Wednesday, November 19, 2008


President-elect Barack Obama says his plan to ensure universal health-insurance coverage will lower family premiums by about $2,500 a year by the end of his first term - a roughly 20 percent reduction in the $12,000 cost of an average comprehensive family health-insurance policy.

While most health economists agree there is waste in the system - perhaps as much as 30 percent - the question is where is it and how to remove it? The Obama team suggests at least three areas for savings:

— Computerizing medical records would save $77 billion.

— Reducing administrative costs would cut out $46 billion.

— Improving prevention and chronic disease programs would reduce spending by $81 billion.

How did Mr. Obama come up with those figures? Is he inflating those numbers (rather than his tires)?

The New York Times published a story recently outlining how some of his advisers reached these conclusions. Let’s just say the process wasn’t what you’d call academically rigorous. And it’s certainly not the kind of hard numbers one would want to build a health care reform campaign around - unless no one is willing to exercise the audacity of inquiry.

Take Mr. Obama’s $77 billion savings on computerizing medical records. The campaign pulled this figure from a study by the well-respected RAND Corp., which says that widespread (90 percent) adoption of health information technology would cost perhaps $8 billion a year to implement, but “annual savings from efficiency alone could be $77 billion or more.” But the study goes on to say, “Because process changes and related benefits take time to develop, net savings are initially low at the start of the 15-year period, but then rise steeply.” In other words, no help early on.

And now the Congressional Budget Office has raised questions about whether aggressive efforts to adopt health information technology would create any significant savings.

Of course, the fact is doctors and hospitals are increasingly computerizing their medical practices on their own - or at least mine are - without threats from the government.

Even shakier is Mr. Obama’s hope of saving $46 billion in administrative costs. Government-run health care proponents claim that Medicare has a 2 percent administrative cost, while private health insurers spend 20 percent or 25 percent - or more. Both numbers are wrong.

As the Council for Affordable Health Insurance showed in a study by a Milliman actuary, that 2 percent is simply the cost of processing Medicare claims. The figure doesn’t capture rent on the buildings, management, monitoring for fraud, etc. - all the things that private insurers must include in administrative costs. Medicare’s real administrative costs are nearly three times the official figure, while the administrative costs of large groups in the private sector, which can maximize economies of scale, are only a little higher than Medicare’s.

Finally, with regard to prevention and chronic disease, about 75 percent of our health care dollars go toward such diseases as obesity, high blood pressure, diabetes, cancer and others. Since many - though clearly not all - of the chronic diseases can be a result of lifestyle choices, getting people to change their behavior could significantly reduce total health care spending and improve quality of life.

But how do we do that in a free society? Many employers and insurers are taking a carrot approach, exchanging premium reductions or other perks when employees participate in certain measures or programs. The government, by contrast, tends to use a stick - and a pretty big one at that. Former Democratic presidential candidate John Edwards, for example, proposed requiring everyone to get preventive care and an annual physical.

To be sure, we can and should improve in the area of prevention and chronic care management, which could both improve health and save money. But be very skeptical of any proposal that claims it can save $80 billion a year. People just aren’t that fond of tofu.

What Mr. Obama’s plan really lacks - and why it will certainly fail - is a way to get the economic incentives aligned correctly so that consumers have a reason to be value-conscious shoppers in the health care marketplace. Instead, he distorts incentives even more than they are by imposing more mandates, regulations and price controls.

We probably can cut health insurance by $2,500 a year, as Mr. Obama suggests, but only by giving consumers, not bureaucrats, more control over their health care dollars.

Merrill Matthews is executive director of the Council for Affordable Health Insurance and a resident scholar at the Institute for Policy Innovation.

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