• Len Nichols: Why Coverage Expansion Comes First

    Some budget hawks argue that we must control health care costs before enacting coverage expansion. We can’t afford the latter without the former, they say. That sounds so sensible it should make anyone wonder why it isn’t. In a 24 February 2010 article in the New England Journal of Medicine, Len Nichols provides the answer (h/t Ezra Klein).

    [T]he simple answer to the hawks … is that it is not feasible to tackle costs without tackling coverage. Our delivery system could not withstand the stress. Two thirds of hospitals lose money on Medicare now. Virtually all lose money because of Medicaid underpayment. To impose serious delivery reform and incentive realignment while leaving hospitals on the hook for the mounting billions of dollars in uncompensated care would bankrupt many and strain most to the breaking point. With expanded coverage, we’ll get absolutely essential hospital cooperation. Without expanded coverage, hospitals will have to protect themselves from change, and their local communities will want them to.

    … Within a decade, we will face draconian health care price controls, massive benefit cuts in Medicare, Medicaid, and the private sector, or both. This credible threat of cost slashing without coverage expansion is one reason the powerful provider lobbies, such as the American Hospital Association, the American Medical Association, and PhRMA (Pharmaceutical Research and Manufacturers of America), have embraced comprehensive reform.

    Backing up to the first sentence in that quote, in what sense is it “not feasible” to implement more severe cost controls without first expanding coverage? The answer includes some dire predictions about hospital bankruptcies. But the real answer, as Nichols makes plain at the end of the quote, is political. The powerful interest groups Nichols lists would resist cost control without coverage expansion. Like it or not, those interest groups must be on board for anything substantial in health policy to occur. That’s just reality.

    Hence, proposed health reform is heavy on coverage expansion and light on cost control in the near term. If there is to be any real cost control it will come later, and gradually. To think it can be done first is fantasy.

    • Dr. Nichol’s line of reasoning only makes sense if “cost controls” simply meant cutting reimbursement rates to providers in Medicare and Medicaid, or somehow otherwise limiting utilization rates under these programs. In that case, providers would need to know that their customer base will grow by several tens of millions of people for this not to have a devastating effect on their bottom lines.

      However, his conclusion is based on the assumption that this is the form that cost cutting will take. If, on the other hand, cost cutting involves more market-driven approaches such as greater price transparency and allowing consumers to purchase a greater share of their own medical care (through any number of financing mechanisms), thus applying downward pressure on provider pricing, coverage expansion would occur naturally. That is, coverage expansion for the uninsured, under-65 population that either forego insurance by choice or are forced out of the market by increasingly expensive plans will be able to finance their own care more easily.

      Cutting Medicare/Medicaid reimbursement rates by 5 or 10% may slow federal spending, but it won’t affect the underlying growth of medical costs, which, it seems, is the real impediment to expanding coverage.

    • Hmm, hospitals could just pay people less. They could buy cheaper equipment and drugs also. They could increase efficiencies. At present, costs tend to just get passed on.


      • @steve – In a sense, that’s the only solution. The trick is setting up payment systems that, over time, pay relatively more for quality and relatively less for volume.

        @HC novice – One time cost cuts won’t affect the rate of cost increases. But adjustments to payment methodology and incentives can. I think it is possible to harness market mechanisms in this effort. Nevertheless, at this time none of the politically dominant stakeholders will permit any form of cost cutting for reasons Nichols expressed. If one is willing to overlook that reality then it makes sense to consider approaches that don’t start with increasing coverage.

    • The baseline reasons for increasing healthcare costs now and in the future are pretty well thought out:
      1) the increasing age of the population,
      2) the increasingly sicker population, not just from the increasing age, but also from the conversion of once quickly fatal diseases into longterm chronic diseases, as well as the burgeoning “diabesity” epidemic with its long list of chronic diseases (although we’ve done pretty well on saving some bucks by stopping the rise of smoking-related disease)
      3) the never ending flow of higher tech and more expensive procedures and medications

      Other drivers of cost, like malpractice costs, inflation of healthcare related salaries, etc. are only sitting on top ot this bedrock. Not much can be done about the first two of those drivers; we’re trying to fight the creeping flab epidemic but not very successfully as yet. The third factor is susceptible to haggling and so on (the cost of an MRI in Japan is 1/10 of what it is here, largely because the cost of an MRI machine in Japan is half of what it is here, largely because nobody would pay more) but innovation is going to keep chugging on no matter what, and that’s probably not a bad thing, even it if isn’t free.

      So, expand coverage or don’t expand coverage; just fine-tuning the pace of medical cost inflation, won’t “solve” it.

    • Market mechanisms are clearly at work in healthcare, but it’s about so many more factors than that.