Friday, February 19, 2010

The Economic Imperative for Healthcare Reform

I spent the last several days at the Annual Leadership Meeting for the Texas Hospital Association. They are a vibrant group of hospital leaders who have some success stories to share during these challenging times. Their Keynote speaker leading off the conference was Len Nichols. Len is a very respected healthcare economist and directs the health policy program at New America Foundation in Washington DC. He has been a frequent commentator on news shows recently in discussions about President Obama's healthcare reform initiative.

Over a number of posts I have discussed the political forces either driving or blocking the passage of a sweeping healthcare reform bill. But Mr. Nichols addressed the economic forces driving this initiative. Basically he is saying that from an economic perspective, we either pass healthcare reform that gets cost increases under control or we will end up with some worse alternative such as price controls. He presented some startling economic indicators that support his concerns.

1) The percentage of a median family's income that is used to purchase health insurance grew from 7% in 1987 to 17% in 2006. At this rate it will be between 35-45% by 2016. That's just six years from now.
2) The percentage of our Gross Domestic Product spent on Medicare was 3.2% in 2008 and will grow to 4.5% by 2020 and 7.3% by 2035
3) The biggest issue affecting our national debt is Medicare cost growth
4) Overall healthcare costs are growing at a rate faster than our productivity and income

We need to change this trend by bending down the cost curve, but that can only happen if we expand coverage to the uninsured. This is a key economic driver behind the President's plan. When you consider that today 2/3 of the hospitals in this country already lose money on Medicare and we are looking to make cuts, they can't survive unless there is expanded coverage.

So from an economic perspective,there are two needed changes in healthcare reform:
1) Changing the risk selection. Current private health providers are incentivised to only insure healthy people. We need to change that to include the sick but include incentives for individuals to maintain a healthier life style.
2) Change fee for service medicine. Everyone agrees that this system is fraught with problems and conflicting incentives. We need to quit paying for volume and start paying for value.

Simply put, we can no longer afford the healthcare delivery and payment system that we currently have. It is only a matter of time, which we are running out of. Maybe it is good that the complex and clandestine plans being run through the House and Senate were slowed down giving us a chance for discussion. But let's stop the political chest thumping and start that discussion. The problem will not go away by ignoring it.

Mark Brodeur

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