Management And Accounting Web

Bast, J. L., R. C. Rue and S. A. Wesbury Jr. 1993. Why we spend too much on Health Care and what we can do about it. Heartland Institute.

Summary by Ann C. Engle
Master of Business Administration and Master of Health Administration Programs
University of South Florida, Fall 2003

Health Care Cost Main Page | Economics Main Page

Chapter 1: What Do We Mean By “Too Much”

The cost of health care affects many influential groups in the United States. These groups include business, labor, state governments, and families. When critics say the United States spends “too much” on health care, they are comparing spending on “other goods and services, spending in earlier times, or spending in other nations”. These comparisons are poor because they: 1. Confuse cost with spending. 2. Have measurement problems. 3. Are often irrelevant and 4. Disregard the inherent subjectivity of value.

I. Cost vs. Spending.

a. Cost includes the price of a good and service and the time consumed or lost as a result of the act. Spending is price times quantity of goods and services. The distinction between the two is important because it shows that other countries spending levels on health care have no relationship to costs of those health care services. For example, they may not spend a lot of money on a health care service, but the cost of less spending may result in the cost of more people in waiting lines to receive that service.

b. Many countries have not commercialized health care as much as the U.S. For example, care for the elderly is not commercialized in other countries where more care is done by families, etc. and not by nursing homes.

II. Measurement Problems

a. It is difficult to measure how much is being spent and how much is being bought.

b. The methodology for calculating the Gross Domestic Product is different in every country. Pricing services is difficult because “differences in quality are hard to quantify”. Measures in GDP for comparisons in different countries do not account for quality of health care services.

III. Relevant Comparisons

a. It is difficult to know if comparisons are relevant even if they were measured properly. If we were able to assume that the reasons for health care spending remain unchanged over time, we would be able to claim that spending levels over the past 30 years are relevant. However, this is not the case.

b. Crime, Drug Addicted Babies, AIDS, are health care crisis’s now but weren’t 30 years ago. The population has also changed, with more African Americans and Hispanics resulting in greater health care need.

c. In order for comparisons between different countries to be relevant, the cultural and economic differences between the two need to be controlled for.

IV. Subjectivity of Values

a. Saying that health care costs are too high “overlooks the inherent subjectivity of values”. In other words, “no one can claim to speak for society when commenting on health care spending or any other topic involving the judgments of many other individuals.”

b. The correct amount of spending on a good or service is the quantity purchased multiplied by the per unit price charged. Prices are set by supply and demand.

c. The supply and demand of health care in the United States are greatly influenced by government policies. Some examples are laws mandating that insurance companies provide coverage for specified conditions, Certificate of Need laws, and laws imposed on hospitals that accept Medicaid and Medicare. In looking at the supply and demand curve, it is evident that the result of these government policies has increased overall spending on health care.

The only way to bring health care spending back to the “right” level is to remove distortions within the marketplace. The right amount of spending will be “the amount spent by consumers in a competitive marketplace with minimum distortions imposed by government subsidies, regulations, and tax policies”

Chapter 2: International Comparisons

International comparisons tend to show that the United States is spending much more money on health care than any other nation. Other countries argue they are able to spend less money due to their nationalized health care system. Comparing the health levels across different countries does not tell us very much about the quality or efficiency of health care because health levels are attributable to genetics, environmental factors, and personal behavior.

I. Percent of GDP

a. GDP is the most common statistic used to measure health care spending in the United States. It is an estimate of the total value of wealth in the nation.

b. When comparing to other countries, percent GDP is misleading because all countries have different economic growth rates. Ex. In the 1980’s, the U.S. had a slow growth of GDP, not a rapid increase in their health care spending.

c. International comparisons reveal that the US health care system probably controls costs better than the nationalized systems of other countries.

d. PPP, purchasing power parity index, is used to convert foreign currencies into U.S. dollars. It is hard to use because it depends on only a small proportion of health care spending in many countries. Health care services in these countries aren’t marketed the way they are in the United States. A large proportion of health care spending in the U.S. is marketed; so spending levels in other countries are underestimated. The PPP index shows that spending by other countries is increasing more rapidly than spending by the U.S. International comparisons of per capita spending suggest a slower rate of spending growth by the U.S.

II. Per-Capita Spending

a. Per-Capita Spending is an improvement over the percent of GDP method because per-capita spending is not obscured when economic rates differ. The per-capita measure shows that the U.S.’s healthcare spending is rising 5th out of 8 countries. Japan, Italy, France, and West Germany all have spending levels greater than the U.S.

Chapter 3: Why Health Care Costs are so high

There Are 5 factors responsible for the high costs in the U.S. These include: I. Wealth and culture of the U.S., II. Geography and Heterogeneity, III. Sex, Crime and Disease, IV. The beginning and end of life, and V. Technology and law.

I. Wealth and Culture

a. Wealth: People with money are willing to spend more on their health than people who do not have a lot of money. The United States has a very high standard of living. We are the wealthiest nation in the world, with a very high Gross Domestic Product (GDP). Therefore, people spend more money on health care services in the U.S. than those of other nations. The high GDP means we would spend more money per year than another country with a lower GDP even if our health care systems were identical (i.e., equally efficient).

b. Culture: The culture of the U.S. also explains a lot of high costs in health care. Many other nations are not as aggressive in seeking health care services as the U.S. For example, the British only recommend pap smears every 5 years and long waits for operations are typical. This would never be tolerated in the U.S., but our spending habits are compared to countries that do tolerate it. Our spending habits are compared in the same way, regardless of cultural differences.

II. Geography and Heterogeneity

c. Geography: The geography and demographics of the U.S. has a lot to do with its delivery of health care services. The U.S. is a very large country with a very ethnically diverse population. It also has a very low population density compared to other nations. Because we are aggressive in receiving health care services, we try to have hospitals and clinics close to patients. Therefore, because our population is dense, we have to provide many facilities in a lot of places, resulting in more facilities than other countries provide. The large size of our country along with a diverse population has lead to “a decentralized and competitive system of financing and delivering health care” (37).

III. Sex, Crime and Disease

d. Poverty, violent crime, and drug use in the U.S. are major contributors to our health care costs.

e. The lifestyles, behaviors, and health habits of Americans are major influences on our rise in health care costs. The lifestyles of Americans makes us more exposed to higher rates of disease. We have an extremely high rate of suicide, and Americans are becoming more obese, exercising less, and drinking more.

IV. Beginning and End of Life

f. The U.S. makes a huge effort to save people’s lives at the beginning and end of life. We try extremely hard to save premature infants by providing neonatal care. We also try hard to take care of our elderly by providing Medicare, which approximately 30% of all Medicare costs can be attributed to the last year of a patients life.

g. Other countries do not make as big of an effort as the U.S. to save lives. For example, the Netherlands has legalized euthanasia, or physician assisted suicide as an option to critically ill patients instead of spending a lot of money trying to save his or her life.

h. Technology and Law.
The U.S. has the best medical technology in the world. Our budget for health
research is much higher than other nations. Through our government, the private
industry, and charitable gifts, we have a lot of money to spend on research and
technology. Our medical technology makes medicine in the U.S. much more
expensive than in other countries.

Chapter 4: Why we spend too much

Government subsidies, tax policy, and regulation cause too much spending.

I. Government subsidies

a. The way the government spends money on health care through Medicaid and Medicare, causes health care inflation because people only have to make small payments for services and thus overuse them. Cost containment efforts began in 1983 with the prospective payment system and the start of DRG's (Diagnostic Related Groups) in hospitals. This forced hospitals to change the kind of care they were delivering to shift costs by shortening the time patients spent in hospitals, increasing and allowing more outpatient care. They tried to shift costs that were from Medicare and Medicaid to private health insurance. The government started out with a retrospective payment system, where hospitals and physicians would provide a payment service to a patient and without question, the government through Medicaid or Medicare, would pay them. In the 1980's, the government moved to a prospective payment system. This caused the price of health care to go sky high by encouraging "excessive utilization and spending". With the drastic change from retrospective to prospective payment, the government caused an increase in costs of "health care to other buyers and changed the way health care was delivered".

II. Taxation of health insurance premiums

a. Tax policy greatly affects health care spending. People who get health insurance from their employers get their health insurance premiums deducted from pre-tax income while those who do not get health insurance from their employers (self-insured, etc.) pay after-tax income. There is a huge difference between paying pre or after tax income. Those with pre-tax benefit. Taxes (social security, federal income, state and local), reduce one dollar of pre-tax income to 50 cents or less of post-tax income. Therefore, paying for health care premiums after tax means that if you earn one dollar of income, you get only 50 cents of health care, whereas if you paid before taxes, your earned dollar gets you an entire dollar of health care.

b. Because of this difference, the demand for employer paid health insurance has risen greatly over time. Many people have gotten used to not having to spend their own money on health care services and thus overuse these services.

c. The Rand Study done between 1974 and 1982 showed that the size of co-payment had a significant effect on how much people used health care services.

d. The current tax law allows only people with high medical expenses to deduct them from their taxable income. People who are unemployed or work for a business that does not provide health insurance get hardly any tax breaks. As a result, they pay close to twice as much as someone who gets employer paid health insurance.

e. The result of health insurance reliance on employer paid insurance has caused greater utilization of services "less monitoring of health care levels, and probably more health demanding conduct".

III. Government as Regulation

There are 6 areas of regulation Medicare, Insurance Mandates, supply restrictions, price controls, regulation of pharmaceuticals, and occupational licensing laws.

a. Medicare: The implementation of DRG's in hospitals and physician reimbursement RBRVS.

b. Insurance Mandates: Some state governments require insurance companies to cover specific treatments such as alcoholism and drug addition.

c. Supply Restrictions: Certificate of Need is enforced by a lot of states, which requires hospitals to get state approval before making investments. Research has shown they have had wither increased or had no effect at all.

d. Price Controls: Managed care programs encompasses half of the people with private insurance. Many state governments interfere with these programs to control health care spending by fixing prices or limiting the range of prices providers can offer.

e. Regulation of pharmaceuticals: Drug manufacturer regulators like the FDA (Federal drug and food administration) are in charge of making sure the drugs are safe. But because there is always a risk involved, they have made the approval process of bringing a new drug into the market a very time consuming and expensive process.

f. Occupational licensing: Licensing laws restrict supply and increase prices because it restricts entry into the health care professions.

Chapter 5: Non-Solutions

I. The problem of the Uninsured: The uninsured tend to be younger and healthier than the general public, and a surprisingly large number of incomes are above the poverty level.

a. Length of Time without insurance: Most of the uninsured go for relatively short periods of time being uninsured. A study done by the Urban Institute found that half of all uninsured lack insurance for four months or less.

b. Age and income of the uninsured: It has been estimated that two-thirds of the uninsured are under age 30, in age groups that have the lowest health costs. Because health insurance will spread the cost of health care across age cohorts, it over charges young buyers.

c. Reasons for being uninsured: In a 1984 national survey, more than half of all people without health insurance said the primary reason for lack of insurance is that people simply “cannot afford it”. Most people without insurance are young, healthy, and employed.

d. Insurance and Risk: Our nation has become more risk-averse. We must change government policies that have made health care prices out of reach of persons who are low-income or unemployed. By doing this, we will significantly reduce the cost of health care and health insurance for many Americans.

II. National Health Insurance: A national health insurance plan would extend government health insurance to every citizen as a basic entitlement regardless of ability to pay. The sale of private health insurance policies would be made illegal or limited to supplemental insurance for private rooms, prescription drugs, or services not covered by the government insurance program.

a. The case for national health insurance rests on three assumptions:

"1. The current system fails to provide adequate access to health care for a large number of people

2. Health care costs would be reduced significantly by eliminating the costs associated with experience rating, insurance marketing and billing, and the different reimbursement methods used by different payers;

3. A single-payer system would give government greater leverage over physician fees and hospital investments in expensive technology and facilities, thereby making it possible to cap overall spending levels."

b. All three assumptions are unpersuasive. There are many programs that have been developed such as Medicare and Medicaid, state-run insurance pools, etc. to provide access to those who cannot find insurance in the private sector. If a problem remains in the insurance market, it is because health insurance prices are too high for many people who are unemployed or who work for companies that do not provide health insurance. Proponents of national health insurance believe that government programs should be more efficient than private programs because publicly funded programs do not include costs for profits, marketing, or premium collection. If marketing by the health insurance industry does not now efficiently produce information about consumer preferences and provider capabilities, the solution is to change tax policies, repeal state insurance mandates, and lift restrictions on negotiations among insurers, providers, and consumers. Government-imposed spending caps do not reduce health care costs, only health care spending. National health insurance allows government to set limits on the number of dollars spent on health care. The cost of our current health care system will remain close to the same, and spending caps could possibly decrease our quality of health care.

c. Would it work? The Canadian national health insurance system is financed mainly by taxes. Although Canada has made a huge effort to control health care spending (keep it at approximately 8.5 GDP), its “high rate of economic growth relative to the U.S. obscures the fact that actual spending has risen quickly”(81). Budget restrictions in Canada have led to a deterioration in quality of health care services and less money invested in health technology and facilities. The waiting lists for health care in Canada have grown.

d. Cost estimates: Economists predict that implementing national health insurance would require a tax increase so large that it would make the United states “one of the most heavily taxed among countries with whom we compete in international trade”.

III. Managed Competition

a. What is Managed Competition? The Jackson Hole Plan: Under the Jackson Hole Plan, insurers and providers would combine to form nonprofit, HMO-like organizations called Accountable Health Partnerships. These Accountable Health Partnerships will then contract with huge purchasing agents called Health Insurance Purchasing Cooperatives. People whose employers refuse to join and HIPC would be denied tax exemption for employer-paid insurance premiums. The Jackson Hole group firmly believes that managed competition will greatly reduce “the cost and difficulty of taking further steps toward universal coverage”.

b. In summarization, government price controls simply do not work in a field as complex as health care, and the current open-ended tax exclusion for employer paid health insurance benefits should be criticized. The insight of managed competition advocates that “large groups of insured create economies of scale and a greater ability to spread risk than small groups”.

c. Is Managed Care so good? Advocates of managed care would like to require that all doctors and consumers join Health Care Maintenance Organizations (HMO’s). In an HMO, doctors are paid a salary or annual per patient fee, and patients may only see doctors on their HMO plan. Half of the employers responding to a recent survey said their HMO rates were as high or higher than their non-managed care plan costs. Survey results also show large variations in cost savings by geographic region. There are many questions about managed care that are still unanswered. We aren’t even sure if managed care actually does help save money. Community rating is another problem with HMO’s. Insurance premiums do not reflect risk. Therefore, those at low and high risk pay the same premium. HMOs also depend heavily on primary care physicians, of which there are not many of in the U.S. since we depend so much on specialists. This would then require a restructuring of our system to provide more primary care physicians.

d. Conclusion: Managed Competition is NOT the solution to the U.S.’s health care problems.

IV. Mandatory Employer Provided Insurance: Mandate that employers provide insurance coverage to all of their full time employees. The argument in favor is that requiring this coverage will extend insurance coverage to many who are uninsured and avoid new taxes and government spending.

a. Effect on the working poor: Those who are the lowest paid would be the ones who are hurt the most from this mandate. This mandate puts the burden of insurance on employers, and small businesses will wind up having to lay off employees to bear the cost of having to cover this new insurance mandate. They would not be able to reduce salaries if they are near minimum wage because this would be illegal, so they will wind up laying off employees.

b. Paying rather than playing: If the payroll tax is set at a low percent (even 9 percent), this would still be less than what small businesses now pay for insurance. If you set a payroll tax too low, this will lead employers to place their employees into the public insurance plan, losing their employer-sponsored plans. Employers will have strong incentives to pay the tax rather than to begin providing their own coverage.

c. More price inflation: The cost of health insurance is likely to increase under the “play or pay” insurance proposal. This is because “health insurance no longer would be subject to contract negotiations between management and labor, and employers and employees no longer would be able to weight the benefits of insurance against its costs”.

V. Socialized Medicine

a. Socialized medicine is different than national health insurance. Socialized medicine shifts not only the funding of health care to the public sector, but the delivery of health care as well (all hospitals, etc. are public or government owned, not private).

b. Socialized medicine is present in both Britain and the Soviet Union. In both countries, it has proven to have a negative impact on the quality of health care.

Chapter 6: Better Solutions

Those who promote national health insurance, managed competition, mandatory employer provided insurance, or socialized medicine have overlooked the real causes of high spending. There needs to be policy changes that will lower health care spending and improve access to care. These policies must address the reasons for unnecessary high spending, by putting the individual consumer back into the center of the health care market place.

I. A Fresh Start

a. Repeal Current Regulation: Existing public policies that “distort incentives and increase costs” must be removed. This will require:

"i. Slowing the growth of federal and state health care entitlement programs in ways that do not result in cost shifting to patients with private insurance.

ii. Repeal of the 700 state laws mandating insurance coverage of specific conditions at a cost as high as $60 billion a year

iii. Repeal of Certificate of Need regulations and other restrictions on competition among hospitals and clinics

iv. Repeal of laws that limit the ability of insurers and providers to form PPOs and other efforts to manage costs

v. Dramatically shortening the current drug approval process that takes too long and costs too much to bring new drugs to market

vi. Repeal of occupational licensing laws, or at least their amendment to allow hospitals greater flexibility in defining the roles of licensed professionals."

b. Tax Reform: The Existing incentives created by tax policies to rely heavily on health insurance must end. We must extend the tax-favored status of employer paid health insurance to those who pay directly for their health insurance. One plan to do this is called the Medical Savings Accounts, where employers could provide employees with insurance policies with high deductibles, (catastrophic insurance). The money saved on premiums could then be passed along to employees. It would be similar to an Individual Retirement Account (IRA). Money could accumulate in the MSA’s from year to year, but money only be taken out to pay for medical expenses. Any money left over at the end of the year can accumulate over time, or can be applied to non-medical expenses. It is much easier for someone who is uninsured to pay catastrophic insurance than it is for them to pay large out of pocket expenses from their after tax income. The MSA plan has found a solution to this problem. Under the MSA plan, these people will be able to use pre-tax income to pay their out of pocket expenses, which would lower their cost by close 50%. People who can’t even afford the catastrophic insurance can receive tax credits or even public deposits into MSA’s so they will be able to participate in the program.

II. The NCPA Plan

The NCPA plan changes the tax treatment of individual health expenditures, so that patients will spend their own money when they purchase health care. The recommendations of the plan are as follows:

"a. Help Uninsured Individuals to Purchase Health Insurance

b. Encourage Employers to Provide Health Insurance for Employees

c. Eliminate Waste and Control Rising Health Care Costs

d. Encourage Saving for Post-Retirement Health Care"

III. The ALEC Plan: American Legislative Exchange Council. The plan has five components and summary is below.

"a. Make insurance more affordable accessible, and portable

b. Private Medicaid through the Use of Vouchers

c. Reform Medical Liability to Reduce Litigation Costs

d. Provide better Alternatives and Options for Financing Long term care

e. Expand and improve rural health care services."

*** The ALEC plan is much like the NCPA plan but it adds more reforms to bring costs under control.

IV. Conclusion: The NCPA and ALEC plans, “by repealing state insurance mandates, would reduce insurance costs by as much as 30 percent”.

Chapter 7: Where we go from here

What you can do?

I. Write and Call your state legislator, Congressman, and Senators.

II. Learn more about the issues: Look up books addressing health care spending, the problem of the uninsured, and solutions.

III. Support organizations that are fighting for responsible health care reform.


Related Summaries:

Abernethy, M. A. and P. Brownell. 1999. The role of budgets in organizations facing strategic change: An exploratory study. Accounting, Organizations and Society 24(3): 189-204. (Summary).

Caltrider, J., D. Pattison and P. Richardson. 1995. Can cost control and quality care coexist? Management Accounting (August): 38-42. (Summary).

Cohen, F. 2011. Improving processes in your practice: Do the same thing with less, or more with the same thing with lean six sigma and lean principles in your toolbox. Medical Economics (June): 60-62,-67-69. (Note).

Davenport, T. H. and J. Glaser. 2002. Just-in-time delivery comes to knowledge management. Harvard Business Review (July): 107-111. (Summary).

Lyons, B., A. Gumbus and D. E. Bellhouse. 2003. Aligning capital investment decisions with the balanced scorecard. Journal of Cost Management (March/April): 34-38. (Summary).

MacArthur, J. B. and H. A. Stranahan. 1998. Cost driver analysis in hospitals: A simultaneous equations approach. Journal of Management Accounting Research (10): 279-312. (Summary).

Porter, M. E. and T. H. Lee. 2013. The strategy that will fix health care: Providers must lead the way in making value the overarching goal. Harvard Business Review (October): 50-67. (Summary).

Ruhl, J. M., B. P. Hartman. 1998. Activity-based costing in the service sector. Advances in Management Accounting (6): 147-161. (Summary).

Sedatole, K. L. 2003. The effect of measurement alternatives on a nonfinancial quality measure's forward-looking properties. The Accounting Review (April): 555-580. (Summary).

West, T. D. and D. A. West. 1997. Applying ABC to healthcare. Management Accounting (February): 22, 24-26, 28-30, 32-33. (Summary).