Sharing the burden of healthcare: providing care to our sickest patients

One of the major challenges to affordable, universal health insurance is the high cost of providing care to the sickest patients. According to Roy Vaughn, senior vice president at BlueCross BlueShield of Tennessee, “just 5 percent of the company’s marketplace customers had accounted for nearly 75 percent of its claims costs.” What is the cost of healthcare for the typical person in the United States?Distribution of per capita US health expenditures 2012

Data from 2012, the last year for which a full analysis is available, presents a complex and confusing picture. The graph above shows per capita expenditures by percentile starting with the highest per capita expenditure. 10% face expenditures of at least $10,250. The median per capita expenditure was $854. The mean average per capita expenditure was $4309 – five times the median – and “the top 1 percent ranked by their healthcare expenses accounted for 22.7 percent of total healthcare expenditures with an annual mean expenditure of $97,956″. In brief, there is no typical person: since the bottom 50% accounted for 2.7% of total expenditures, the average per capita expenditure of the top 1% was 420 times that of the bottom 50%. There really is no typical person in terms of healthcare expenditures.

Pareto/ power law distribution of healthcare costs

This extreme distribution of healthcare costs (approximately an “80/20”, Pareto/ power law distribution) poses a major challenge to providing universal healthcare through traditional insurance models based upon risk pooling. Prior to the Affordable Care Act (ACA), the US health insurance industry addressed these challenges with risk selection – adjusting premiums or denying insurance to patients with high predicted risks, such as those with pre-existing conditions, and imposing caps on annual and/or lifetime benefits, much like the way the auto insurance industry sets premiums and limits benefits to address extreme differences in projected driver risks. Come back tomorrow for another blog post with more technical details about the Pareto distribution and healthcare costs.

Risk selection is illegal but prevalent

The ACA makes both caps on benefits and risk selection based upon pre-existing conditions illegal. In particular, US insurance carriers are required to provide coverage to all, at rates independent of pre-existing conditions, a requirement which President-Elect Donald Trump would like to keep.

However, the extreme distribution of healthcare costs means that “Targeting the highest spenders represents the greatest opportunity to have a significant impact on overall spending”; an opportunity for insurance carriers as well as for public policy. Moreover, there are good predictors for high spending: age and end of life, chronic conditions, and high spending in a previous year. For example 44.8% of the top decile in 2008 healthcare expenditures “retained this top decile ranking with respect to their 2009 healthcare expenditures”; a fact cited in an extensive Forbes report. Swiss and Dutch experience found risk selection prevalent and persistent. However, with every adult paying the same premium – within a given fund for the same type of contract – but expected healthcare expenditure (HCE) varying widely, strong incentives for risk selection are created in the absence of an adequate risk adjustment scheme. Although risk selection is illegal, it is prevalent. Swiss conglomerates of insurance carriers have been reported to achieve risk selection by assigning applicants to “specific carriers based on their risk profiles.”

Removing the economic incentives for risk selection

There is one clear way to avoid built-in economic incentives for risk selection (incentives which seem to drive insurance company behavior); that is, a single payer system, universally or as excess coverage for significant, predictable expenses. The United States now has several parallel single payer systems, namely Medicare for the elderly, Medicaid for the very poor and CHIP for children; thus, in effect, a public/private partnership in healthcare. These pre-existing single-payer systems might serve as models for a more inclusive US single payer system. Alternatively, the United States might act as an insurer of last resort, providing umbrella insurance covering individual expenses above some relatively high limit, or for costly but treatable conditions using the End Stage Renal Disease (ESRD) Program, passed in 1972 as a model. This approach would also remove extreme costs from the health insurance risk pool, as both Medicare and the ESRD Program do now, by providing near-universal coverage for our sickest patients outside the private insurance system (elderly US citizens and those with severe chronic kidney disease, respectively).

Tomorrow I will return to the Pareto-like distribution of healthcare expenditures and its consequences for any competitive insurance program. But for now, a few conclusions. Medicare and the ESRD program provide models for a smooth transition from health insurance pre-ACA with its caps and limitations to a more universal system. Medicare can be expanded to a broader public alternative. Universal coverage for additional treatable but high-risk conditions can be modeled on the ESRD program. These steps should provide the basis for further evolution of the present public/private partnership into a more universal, more cost-effective system.

In my opinion, the extreme distribution of healthcare expenditures and the ability to perform risk selection, even though illegal, present a strong, essentially irrefutable argument for a single payer system; either overall, or for chronic conditions and expenditures predictable through risk selection. In the US, Medicare and the ESRD program provide illustrative, successful and useful models.


Review: Credit Crunch Health Care (Cam Donaldson)

Credit Crunch Health Care – How economics can save our publicly funded health services

Paperback, 160 pages, ISBN: 9781847427526, published 16 February 2011

Amazon / Google Books / The Policy Press

Cam Donaldson has chosen to use his powers of prophecy for good in his new book ‘Credit Crunch Health Care’. Its publication, earlier this year, came just 4 weeks after the Health and Social Care Bill 2011 was presented to parliament here in the UK – a bill widely viewed as a big step towards privatisation of the NHS. Donaldson’s book sets out to tell us all why, and how, we must fight to maintain publicly funded health services. And it does a damn good job.

From the opening sentences, the author’s views are clear. However, they are not allowed to dominate the proceeding 120 pages, which are filled with basic economic theory and bulletproof facts and figures. The reader is introduced to concepts such as market failure, marginal benefit and cost-effectiveness analysis; concepts underlying the efficiency arguments in favour of publicly funded health services. Throughout, the book is unfalteringly relevant and up-to-date, citing current policy issues such as Obamacare and GP commissioning. The book is by no means perfect. Donaldson’s candidly titled chapter, ‘The fiscal future of health care: an economist’s rant’, and his explanation of PBMA (programme budgeting and marginal analysis) is a little convoluted and less clear than the rest of the book. However, these shortcomings do not detract from the book’s key message; that publicly funded health services must be defended on economic grounds. The true value of this book lies in its content’s accessibility, readability and concision. The reader is not assumed to have a prior knowledge of economic theory and as a result the book becomes accessible to anyone with an interest. The book also succeeds in stripping away unnecessary intellectual baggage, with which economists’ writings are often laden. As such, it stands alone as a necessary and sufficient introduction to health economics for commissioners, managers, doctors, nurses and academics alike.

The relevance of this book, at this time, is undeniable. As commissioning responsibilities change hands in the UK, and Americans demand universal coverage, there is a need for non-economists to grasp the concepts presented so plainly in this book. ‘Credit Crunch Health Care’ could be read by anybody and everybody involved in the provision of health care in the UK and worldwide. And I believe it should.