Monday, October 26, 2009

It's time to slay the bureaucratic monster that's ruining the NHS

Why is there a layer of bureaucracy between Primary Care Trusts and the British government?

Who actually runs the National Health Service in my Sevenoaks constituency? Is it Dawn Hall, the manager of Sevenoaks hospital, or Andy Burnham, the Secretary of State for Health? There are an awful lot of people between Dawn Hall and Andy Burnham, and most of them aren't medical at all.

First, there's the West Kent NHS Primary Care Trust. It has 21 directors, and "around" 350 "commissioning" staff; management costs are £12 million a year. Its accounts reveal a director of strategy and corporate affairs, whose pay last year rose from £90-95,000 to £95-100,000, and a director of strategy and communications, whose pay went up by 10 per cent to £85-90,000. All executive directors received a 3 per cent bonus.

Next, there's the Kent & Medway NHS and Social Care Partnership Trust, which is mainly responsible for mental health services. Fifteen directors here, including a "director of corporate services" on £75-80,000 a year. Management costs are £11 million.

Then there's the Maidstone & Tunbridge Wells NHS Trust, which runs three acute hospitals. Management costs increased 7 per cent last year, to £9 million. Reporting to 10 board directors are a corporate development director (£85-90,000), a chief operating officer (£155-160,000), as well as a chief executive (£190-195,000).

Serving the trusts is another – the South East Coast Ambulance Service NHS Trust. It has 13 directors, including a director of corporate affairs and service development (£90-95,000) and a director of human resources and organisational development (£105-110,000). Management costs are £10 million, 6.6 per cent of income, and rose 25 per cent in 2008-09.

But the queen quango of them all is our Strategic Health Authority, NHS South East Coast. It has 14 directors, including a director of communications and engagement who was paid £125-130,000 last year. In 2008-09, its budget was so large – at £313 million – that it couldn't spend £40 million. Management costs rose 30 per cent, to £16.8 million. Employing 343 staff cost £20 million a year.

So what do they do for us in Sevenoaks at their HQ in Horley, Surrey? Given that the Primary Care Trusts are much larger now, why is there a layer of bureaucracy between them and Whitehall?

The hospital building programme has passed its peak; the trusts have been reorganised; there are numerous regulators, inspectorates and commissions. So what is there strategic to do?

NHS South East Coast's report boasts a string of successes, including reducing infection, speeding up treatment times and extending GPs' opening times. But these improvements are delivered by local professionals, not regional bureaucrats. The Strategic Health Authority even claims credit for the Ambulance Trust's improvement in response times: that's because we spend £150 million on the latter, not the former. So what's a strategic health authority for?

Let's look at that under-spend again. £1.5 million was under-spent on "workforce and development"; £5.6 million (62 per cent of budget) was under-spent on "sponsored services"; £11.4 million (55 per cent) under-spent on "strategic health authority central initiatives".

If regional bureaucrats can't even spend the money they have got, why not delegate it straight through to the trusts? There is simply too much management right across the NHS, most of it duplicating, interfering or counter-productive, and all of it diverting resources from the hard-pressed units and nurses who treat real people.

Andy Burnham has inherited this nightmare, but it's too late for Labour to roll back the bureaucratic monster it created. Exactly half of the entire 1.3 million NHS workforce isn't treating patients. The real questions are for the Conservative shadow health secretary: Andrew Lansley, are you listening?


In Health Care, Nobody Knows Anything

Two new industry studies reignite the debate about what makes health care so expensive

“Nobody knows anything,” is the famous dictum that screenwriter William Goldman once asserted about Hollywood movie-making. Goldman was saying that movie producers have no clue about whether or not a movie will sell until it hits the theaters. There is no formula for a hit movie.

Figuring out health care in America is only slightly more complicated and mysterious than making a hit movie. Fifty million Americans are unable to buy health insurance and premiums have doubled over the past decade. Health care spending in 2009 consumes about $2.5 trillion, more than 17 percent of our gross domestic product. And as spending has skyrocketed, improvements in health outcomes have been real, but modest. What’s going on?

On Saturday, President Barack Obama denounced two new studies, sponsored by the health insurance industry, which found that current health care reform bills in Congress will increase premium prices for consumers. One study, done for the lobbying group America’s Health Insurance Plans by the consultancy PriceWaterhouseCoopers, found that the provisions in the Senate bill sponsored by Sen. Max Baucus (D-Mont.) would add $1,700 a year to the cost of family coverage in 2013 and $600 for a single person. By 2019, family premiums could be $4,000 higher and individual premiums could be $1,500 higher. A weak individual coverage mandate, coupled with a guarantee issue requirement, no preexisting condition limits, and no rating based on health status would significantly boost insurance premiums.

The Blue Cross Blue Shield Association commissioned a new study by the Oliver Wyman consultancy which also found that guaranteed issue and community rating mandates coupled with a weak individual mandate would drive up premiums by 50 percent for individual policies and 19 percent for small group plans.

“Every time we get close to passing reform, the insurance companies produce these phony studies as a prescription and say, ‘Take one of these, and call us in a decade,’" declared the president. “Well, not this time.”

The president is right that we should always be skeptical of studies that find in favor of the groups that sponsor them. And these two insurance industry-sponsored studies do have their flaws. But the finding that guaranteed issue and community rating mandates increase insurance premium prices has been corroborated by other academic researchers. For example, researchers from MIT, the Brookings Institution, and Brigham Young University reported in a 2008 study published in Forum for Health Economics & Policy that community rating regulations increased premiums for high-deductible policies for individuals by as much as 17 percent and families by as much 33 percent in the nongroup market. In addition, the researchers found that the “guarantee issue regulations that accompany community rating regulations in New Jersey are associated with premium increases of well over 100 percent for individual and family policies.” And as my colleague Peter Suderman recently pointed out, Massachusetts, the one state that combines an individual mandate, community rating, and guaranteed issue, now has the highest premiums for family insurance plans in the country.

President Obama also denounced the insurance industry malefactors for “making this last-ditch effort to stop reform even as costs continue to rise and our health care dollars continue to be poured into their profits, bonuses, and administrative costs that do nothing to make us healthy—that often actually go toward figuring out how to avoid covering people.”

Obama is right that administration costs can be quite large. Why would health insurers spend so much money on administration? According to the New England Journal of Medicine, the director of the Office of Management and Budget, Peter Orszag, cites evidence that $830 billion is being spent this year on unnecessary care. That represents about 30 percent of all health care spending. Of course, insurers have a big interest in trying to reduce unnecessary spending, so they hire flocks of administrators to negotiate lower rates and to monitor medical spending charged by doctors and hospital administrators. Government health care programs like Medicare don’t have to negotiate; government agencies just fix prices, which means they fail to combat waste and fraud effectively.

What about those insurance company profits? Back in July, President Obama asserted that health insurance companies are making “record profits.” Not really. The Annenberg Public Policy Center’s reported, “In general, the health insurance industry did poorly toward the end of 2008 and in the first quarter of 2009, so record profits weren’t likely in the second quarter.” Averaging profits of 3.3 percent, health insurers are the 86th most profitable industry in the U.S., well behind chain restaurants (7.7 percent), electric utilities (6.2 percent), and brewers (18 percent), but ahead of major auto manufacturers (-3.3 percent), resorts and casinos (-8.9 percent), and major airlines (-11 percent).

We’ll pass over the president’s naked attempt to provoke voter envy about the big paychecks of health insurance executives, since taxing them away entirely would not perceptibly lower the costs of health insurance.

So why have health costs, and especially health insurance premiums, skyrocketed since 2000? Let’s look at one plausible theory: market consolidation. In the past two decades, fewer and fewer competitors are exercising more and more monopoly control over health care spending. Case Western Reserve political scientist Joseph White looks at the last time a Democratic administration pushed for health reform. In 1993, recalls White, “costs were expected to quickly hit 14 percent of GDP and rise to 18 percent by the end of the decade.” But that didn’t happen. Why? One plausible story focuses on the rise of health maintenance organizations (HMOs).

The rise of HMOs was enabled by an earlier federal government attempt to rein in health care costs, the Health Maintenance Organization Act of 1973. The idea behind HMOs was that these insurers would control costs by offering a wide array of preventive care to their subscribers. That sounds like a plausible idea until one realizes that people, on average, change insurers every four years or so. An insurer that invested in preventive care was unlikely to reap the cost-saving benefits. Thanks to the spread of HMOs, the 1990s saw the rise in health care expenditures slow down. Why? Chiefly because HMOs fiercely negotiated lower prices from physicians and hospitals. But the era of modest premium price increases didn’t last long.

Hospitals and physicians struck back by beginning to consolidate themselves. As hospital mergers produced local monopolies, they were able to increase their prices substantially. “I find that hospitals increase price by roughly 40 percent following the merger of nearby rivals,” Leemore Dafny, an economist at the Kellogg School of Management at Northwestern University concluded in a 2008 study. Insurers with relatively few patients could not bargain effectively with the new local health monopolies, and so dropped out of those markets.

According to White, the result of the 1990s orgy of insurer and provider consolidation was that “there were half as many health plans in 2004 as in 1996.” In addition, “in thirty-eight states the largest firm controlled at least one-third of the insurance market; in sixteen states it controlled at least half.” In this analysis, insurers and hospitals have evolved into local oligopolies. One plausible story, it seems, is that an ever more monopolistic health care system has been fueling the recent double digit increases in health care costs.

But then you remember, nobody knows anything when it comes to health care. In 2003, the Federal Trade Commission issued a report that concluded that there was “no valid empirical basis” for the claim that consolidations among hospitals “have accounted for increases on hospital services.” But what about consolidation among insurers? “The insurance industry is congenitally weak in bargaining with supply side of the American health sector,” explained Princeton University health economist Uwe Reinhardt on a recent NPR Money Planet segment. Reinhardt believes that insurers largely dance to the fiscal tune whistled by hospitals and physicians.

Clearly there has been a drastic failure of market competition when it comes to the health care sector. The question is how can market forces of competition be brought to bear on escalating health care costs?

An essential player is absent from the competitive field: the actual consumer of health care services. So long as insurers can extract their premiums from employers and providers can extract payments from insurers, the health care industrial complex has very little incentive to rein in costs.

Recent efforts have been made to create so-called consumer-driven health care based on high deductible insurance policies. Because consumers are on the hook for the first several thousand dollars in health care costs, the idea is that savvy consumers will shop around for health care services and thus force insurers and providers to lower their prices. This cost-reducing dynamic works in most other areas of our economy, so why not in health care?

One of the chief problems is that consumers haven’t a clue about what their insurance and medical services cost. Hospital chargemasters (essentially comprehensive lists of all charges) typically contain prices for over 20,000 items and services. Sorting through those lists for the best prices would be impossible for consumers. But why should they have to? In markets, the proper dictum is that “nobody has to know everything.” Markets are superb at gathering widely dispersed information and resources from millions of people and firms and then distilling that information into prices.

When someone buys a car, they are not confronted with a bill listing separate prices for pistons, radiators, assembly line screw tightening, seats, gas tanks, windows, and so forth. Nor when they buy a hamburger are the prices for the beef, bun, wrapping paper, and special sauce listed and charged for individually. The market has bundled those separate items together into a single price. Competition sparked by consumer demand could unleash a similar simplifying dynamic in which prices for health insurance and medical services become bundled and more transparent.

So what kind of real reforms could increase health care competition? Congress should aim to break up the system of local monopolies into which our health care sector has devolved. In his Saturday attack on health insurers, President Obama noted that the industry enjoys “a privileged exception from our anti-trust laws, a matter that Congress is rightfully reviewing.” What he is talking about is the McCarran-Ferguson Act of 1945 that allows state governments to regulate the business of insurance without federal government interference. The Act is, in part, responsible for the evolution toward state insurance markets dominated by just a few large insurers.

Consumers cannot purchase insurance policies that are not licensed by their state insurance commissions and which do not incorporate all the mandates imposed by those commissions. Congress and the states should open up competition between insurance companies by enabling “regulatory federalism” that would allow individuals and employers to purchase health insurance from other states. As a report from the free-market Cato Institute notes, regulatory federalism would force state insurance commissions to compete among themselves. The result would be that “states that impose unwanted regulatory costs on insurance purchasers would see their residents’ business—and their premium tax revenue—go elsewhere.”

Barriers to increased competition among health care providers must be removed too. For example, many states have certificate of need programs that forbid the construction of new health care facilities without prior regulatory approval. Passed by Congress in 1974 as a cost-cutting measure, the ostensible purpose of the programs is to keep health care costs low by requiring advance approval by state agencies for most hospital expansions and major equipment purchases. But regulations don’t really work that way. “Market incumbents can too easily use [certificate of need] procedures to forestall competitors from entering an incumbent’s market,” according to a 2004 Federal Trade Commission report. In fact, “programs can actually increase prices by fostering anti-competitive barriers to entry.” State enforced monopolies increase prices? Who knew?

There is one thing that everybody should know when it comes to health care: Competition in markets tends to lower prices and improve quality over time. It can do so in health care markets as well.


The desperate defense of Obamacare

The political arena has abandoned all civility, it seems. It was coming our way once folks like Ralph Nader and Michael Moore got to be bigwigs, speaking up in support of populism and a massive federal government. The American citizenry tends to be middle of the road, championing a mixed economy but resisting either extensive statism or full freedom from coercive government. Most people seem to want the chance to get government to do their special bidding, so they will not sign up to restrain its powers completely. Neither, however, will they grant the government all the powers its most avid advocates would like. I have in mind the likes of Chuck Shumer and Henry Waxman among the Democrat politicians and some of the Republicans who border on authoritarianism.

But these days if you opposed government health care, you are a right-wing lunatic, a wild person or barbarian so there is no use trying to argue with those who are committed to socialize the American medical system. They have dismissed all serious skeptics. The train must not be stopped as it is hurling toward full government involvement in all areas of society, at every level. This may not be objected to without getting those who love it to call you names and flatly ignore your concerns. Only compromisers will get some attention since they don't question the policies at their foundations.

I am a regular reader of the center left magazine The New Republic and even it is having a hard time remaining somewhat civil about opponents of President Obama's mission. In a recent issue the editors jump on board with those who have declare Americans who fervently oppose Obama's health care and insurance plans as racists of some kind. The writers said they don't much worry about this racism but insisted that it was that, not bona fide political disagreement about the direction the federal government is taking under this president. And The New York Review of Books, which I also read regularly, has rolled out Elizabeth Drew who tries to tarnish everyone who doesn't genuflect at the altar of medical statism.

Some in this administration are really quite un-American, seriously! I have in mind, among others, Obama's regulatory czar, Professor Cass Sunstein, who believes that (a) government is the source of our rights and (b) government should grant animals rights of the sort human beings have. This is no small matter. After all, what is distinctive about the American political tradition is what it says in the Declaration of Independence, namely, that the rights everyone has, every human being, are ours by virtue of the fact that we are human beings. All of us, except the hopelessly incapacitated, have these rights, yet Professor Sunstein and his boss, we may assume, think that governments, in the fashion of monarchs of days gone by, hand out rights, meaning, grant privileges or permissions. (I always cringe when people say "Government allows us to...." because government as the American Founders and their teachers knew haven't any magical powers to allow anyone anything.)

Government doesn't stand to us, the citizenry, as parents and nannies stand to children. Government is a group of hired administrators, not czars, kings or Caesars. So when this president eagerly endorses the views of people such as Sunstein as he is charging ahead with transforming the country into something it had vehemently gotten away from when it was founded, opposition should be expected. And some of it will be loud, even a bit unruly. Instead, however, of laying out a set of reasons for why this change ought to be undertaken and communicating them to us all, the critics are being denigrated, dismissed, and besmirched...

But perhaps the hysterical attitude toward all who question Mr. Obama's rush to massive statism carries an implicitly hopeful message. The ideas behind this march are bankrupt so its champions will not talk them up. Instead they have to demonize those who are skeptical.


Where Does Congress Get The Authority To Mandate Purchase Of Health Insurance?

When asked where Congress was given the authority to force Americans to buy health insurance, Senate Judiciary Chairman Patrick Leahy (D-Vt.) didn't really have an answer -- he just deflected the question by accusing the reporter of asking an inappropriate question: " Why would you say there is no authority? I mean, there’s no question there’s authority. Nobody questions that!"

House Majority Leader Steny Hoyer (D-Md.) at least dusted off the old Constitution. He referred to Article I, Section 8, where the the Constitution gives Congress the power to raising taxes to “provide for the … general welfare of the United States.”

"Well, in promoting the general welfare the Constitution obviously gives broad authority to Congress to effect that end,” Hoyer said. “The end that we’re trying to effect is to make health care affordable, so I think clearly this is within our constitutional responsibility."

Nice try, Congressman -- except, as CNS News points out, the authority to impose a tax isn't the same as the authority to mandate purchase of a good or service.


Cognitive dissonance on health care reform

Cognitive dissonance is defined as holding two completely contradictory ideas at the same time. That seems to be the case with the American public, with a new poll showing rising support for a so-called public option in health care, even as the public continues to oppose greater government control over the health care system.

Most likely that is because supporters of a public option have successfully framed it as just that: an option. That seems entirely reasonable. The American people believe in "choice" and "competition." So why not allow another choice? Most Americans would keep the insurance they have today (and are happy with), but those who wanted to join the government plan could do so. But that's not the way it would actually work.

A government-run plan would have an inherent advantage in the marketplace, because it ultimately would be subsidized by taxpayers. The government plan could keep its premiums artificially low or offer extra benefits, because it could turn to taxpayers to cover any shortfalls. At the very least, the program carries with it an implicit guarantee against future losses. Would a Congress that has bailed out banks and automobile companies because they are "too big to fail" resist subsidizing the government's insurance plan if it began to lose money?

Even without direct subsidies, the government could prevent the true cost of the program from showing up in premium prices in myriad ways. For example, the government-run plan will not have to pay state or federal taxes, and unlike private insurance plans, who can be sued in state courts, the government-run plan could only be sued in federal court.

Government plans such as Medicare and Medicaid traditionally reimburse providers at rates considerably lower than those of private insurance. Providers recoup the lost income by shifting costs onto those with private insurance. Indeed, it is estimated that privately insured patients pay $89 billion annually in additional insurance costs because of cost-shifting from government programs. If one assumes that the new public option has similar reimbursement policies, it would both allow the public plan to keep its own premiums artificially low while simultaneously increasing costs and, therefore, premium prices for private insurance.

All of this means that the government-run plan would be significantly cheaper than private insurance, not because it would out-compete private insurance or because it was more efficient, but because it had unfair advantages. Businesses, in particular, would have every incentive to dump their workers into the government plan.

Estimates of how many people would ultimately be forced out of their current insurance and into the government plan vary widely. At the low end, the Congressional Budget Office suggests that about three million people would be involuntarily shifted to the government plan under the House bill. It bases this estimate on a premise that that the plan would only be open to the currently uninsured and employers with fewer than 50 employees. On the other hand, the actuarial firm Lewin Associates assumes that the government plan would be open to everyone. Under that scenario, they suggest, 89.5 million workers would be forced into the government plan.

In the end, the private insurance market would be eviscerated, leaving millions of Americans with no choice but the government-run program. No choice. No competition. We would effectively be on the road to a single-payer health care system, with the government in complete control of one-sixth of the U.S. health care system and some of the most important, personal, and private decisions in our lives. Down that road lie massive new taxes, huge budget deficits, and ultimately government rationing of care. That is not what the American people are telling pollsters they support.


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