In today’s New York Times, Jon Gabel of the University of Chicago makes a persuasive case that the “official” CBO numbers on the cost of health care reform are significantly overstated. To the extent that is true, this undercuts the key (valid) argument against it — that it is too expensive. He points out that the CBO has often overestimated the costs of previous government actions on health care. For example:
“In the early 1980s, Congress changed the way Medicare paid hospitals so that payments would no longer be based on costs incurred. Instead, hospitals would receive a predetermined amount per admission, based on the patient’s primary medical problem. This encouraged shorter stays, led to fewer diagnostic services and reduced administrative costs.
“The Congressional Budget Office predicted that, from 1983 to 1986, this change would slow Medicare hospital spending (which had been rising much faster than the rate of inflation) by $10 billion, and that by 1986 total spending would be $60 billion. Actual spending in 1986 was $49 billion. The savings in 1986 alone were as much as three years of estimated savings.”
The key reason for the overestimated costs is that if an approach is new, and there is no good precedent to go on, the amount of the savings are unknown. If they are unknown, the CBO scores them as zero. Clearly, undertaking comparative effectiveness studies to reduce the use of expensive treatments that don’t work very well has the potential to save a lot of money. The amount is not known, but it is clearly more than nothing.
Often these treatments are more agressive than the less expensive approaches. If tort reform makes doctors less afraid to, say, adopt a wait-and-see approach to an elderly man’s prostate cancer, rather than operating out of fear that the passive approach will get him sued, it could save a lot of money. After all, far more elderly men die with prostate cancer than of prostate cancer.
Clearly doing nothing on Health Care reform is not good for the long-term budget outlook. Medical inflation is at the core of the long-term budget deficit projections, which are now expected to total over $9 trillion over the next decade (5.1% of GDP). If we do nothing, then all hope is really lost.
Medicare and Medicaid would effectively gobble up the entire budget by 2030, with the exception of interest on the debt, which will also be skyrocketing. More and more businesses would stop offering health insurance and as a result, more and more Americans would be without access to health care, with the exception of going to the emergency room when they are very sick.
It is looking more and more like we will not get real health care reform this year. The passing of Senator Ted Kennedy means that the Democrats have lost their filibuster-proof margin in the Senate. We might get something that is called Health Care reform, that tinkers around the edges, but we will not get the public option, and whatever we get is unlikely to be serious competition to the entrenced health insurance oligopoly.
Some of the more outrageous types of misconduct by the likes of United Heathcare Group (UNH) and Aetna (AET) might be curbed, such as the cancelling of policies as soon as someone gets sick and puts in a substantial claim. Morally, that is just plain fraud (“You didn’t tell us that you went to see a dermatologist for your acne when you were 16, so we will not cover your cancer treatment at age 55”), although the insurance companies have very good lawyers who write the contracts to make sure they can get away with it.
It might even end the practice of discriminating against sick people (aka pre-existing conditions). It will come at the expense of using the force of law to get the young and the healthy to buy coverage. Since the young, on average, seldom make expensive claims, those customers would be a gold mine for the insurance companies.
None of those things are likely to stop the relentless rise in Health Care costs as a share of GDP. The nation may go bankrupt, but the health insurance companies will not. They will be even more prosperous than they are today. Their investment in people like Sen. Max Baucus (D-MT) and Kent Conrad (D-ND) has to go down as one of the most profitable in history.
With more than 25 years of experience as an analyst and portfolio manager, Dirk van Dijk is Zacks’ Chief Equity Strategist. He also manages the new long-term investing service, Strategic Investor.
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