Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.
My last post, “The Role of Prices in Health Care,” contained a chart connecting health spending with health income. One reader commented:
The graph misses a very major, and growing, component of the U.S. health care system. In between “the rest of society” and the “owners of health care resources” there is not only the “health care system” but also the United States government (unless we view the government as one of those resources). This is sapping a not insignificant portion of the resources that could and should otherwise be devoted to the provision of actual health care services.
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I am not sure just what to make of this. Is the argument that government is a sinkhole that absorbs “a not insignificant portion of the resources” that could otherwise be devoted to health care proper? Are there not other intermediaries, such as private insurers? Or is the argument that government as a public provider of health insurance to millions of Americans siphons off financial resources and returns no benefits to society, while private insurers do?
Consider the chart below. It illustrates that the flow of money through health care in the United States is complicated, with many detours on the way from households, which ultimately pay for all of the nation’s health care, to providers. Along the way are a number of pumping stations, employers among them.
Naturally, the providers of health care receive less than what households originally contributed to finance health care. Like private insurers, public insurers are pumping stations along the way that keep some of the money to finance their own operations. And both the public and private pumping stations provide society benefits in return, namely, access to health care when needed and the peace of mind that the family will not go broke over medical bills from a major illness.
Readers who seek to get a feel for the dollars flowing through this piping system — $2.6 trillion in 2010 — can find insight in Table 16 of the most recent National Health Expenditure Projections published by the Centers for Medicare and Medicaid Services of the Department of Health and Human Services (referred to hereafter as C.M.S. data).
This next chart conveys an idea of changes over time in the money flow through major public and private insurance programs and through out-of-pocket payments by patients. It should be noted that the fraction of Medicaid in this chart includes the federal match, which is about two-thirds of total Medicaid spending. It is a fact that government insurance programs have played an increasing role in the overall health care money flow. Their role in the future is now a fiercely debated issue in the political arena.
To get a rough indication of what fraction of the money flow is retained by the various pumping stations in the money flow, it is helpful to compare what the C.M.S. actuaries call National Health Expenditures, or N.H.E., with what they call Personal Health Care Expenditures, or P.H.C., a component. N.H.E. includes all outlays on health care, including research and construction. It also includes what the intermediate pumping stations (i.e., public and private health insurers) retain for their operations. P.H.C., on the other hand, represents only what the providers of health care received from the various intermediaries and directly from patients.
This next chart exhibits personal health spending as a percentage of total national health spending for three health insurers: private insurers, Medicare and Medicaid. These data are calculated from Tables 3 and 5 of the C.M.S. data. These percentages suggest that a relatively high share of the funds Congress and state legislators appropriate for the two largest government programs, Medicaid and Medicaid, becomes revenue for the providers of health care.
According to a C.M.S. actuary, for the traditional Medicare program excluding money contributed by Medicare to private Medicare Advantage plans on behalf of beneficiaries choosing those plans, as much as 98 cents is paid to providers for every $1 appropriated by Congress for Medicare. (The 93.8 percent shown in the next chart includes Medicare dollars channeled through Medicare Advantage plans.)
In fairness, it must be added that traditional Medicare basically sets prices and then just pays bills. It makes no active attempt to manage care (utilization controls, disease management, coordinating care and so on), because it has not been allowed by Congress to do so. It is almost as if Congress did not want traditional Medicare to be a prudent purchaser of heath care for the elderly.
From the viewpoint of prudent purchasing, most economists would probably judge these prices too low. On the other hand, the fact that traditional Medicare just pays bills more or less passively may be precisely the reason that it is still so popular among the elderly. Traditional Medicare still offers beneficiaries completely free choice of providers and therapy — a degree of freedom that many younger Americans in insurance plans with limited networks of providers no longer enjoy.
The ratio of P.H.C. to N.H.E. for private insurance reflects what is known as the medical loss ratio, or M.L.R., on which I have written a post previously. It is the fraction of the premium an insurer pays out for “health benefits.” The overall average of 88.3 percent for private insurance includes M.L.R.’s ranging all the way from a low 55 percent for small insurers selling policies to individuals and small employers, mainly through insurance brokers, to M.L.R.’s above 90 percent for large insurers performing merely administrative services (e.g., negotiating fees or claims processing) for self-insuring large employers.
The ratios in the last chart should not be confused with the overall administrative overhead of health care in the United States, a topic already touched on in an earlier post. A public or private health insurance program not only has its own operating costs but visits substantial administrative costs on the providers of health care, mainly on billing properly for services rendered.
I shall comment on these additional overhead costs in a future post.
Article source: http://feeds.nytimes.com/click.phdo?i=8d9f2c092dc61e27ceedc4d516123768