New Year’s Resolution? Let’s Make it about Cost

This post was first published on Project Millennial.

2013 has been the year of the (botched) insurance expansion. But if the experience of other countries is any lesson, we should hope for political attention in 2014 to be devoted to another looming issue.

Over dinner with a few panelists at the Lown Conference, I learned about their involvement with the World Bank’s Universal Health Coverage (UNICO) Study Series, a comparative analysis of efforts to achieve universal coverage in 22 countries and Massachusetts (“the People’s Republic of Massachusetts”, as one panelist fondly called it).

And Then Came the Cost Issue

Befittingly, this People’s Republic was recently profiled in Health Affairs for lessons learned from its experience with cost containment, an issue it has been grappling with since achieving near-universal coverage in 2006.

Lesson number one?

“The first lesson is that the implementation of near-universal coverage triggered a new political resolve to address the difficult challenges of cost containment.”

In other words, achieving near-universal coverage subsequently made the cost issue too dire to ignore. While there is debate over whether insurance expansion accelerated cost growth (some say yes, others no), the facts are that Massachusetts’ per capita health spending is 15% higher than the national average, and that it has the highest individual market premiums in the country.

(Update: Medicaid expansion increased ER use by 40% in Oregon, so it’s not an inconceivable hypothesis.)

Interestingly, the same sequence of events is playing out halfway across the world.

Taiwan’s Looming Health Budget Challenge

After returning from Boston, I had the opportunity to grab lunch with an individual who was involved with Taiwan’s health sector for a number of years. Through that, I learned that Taiwan is facing a remarkably similar cost challenge.

Taiwan’s National Health Insurance (NHI) system has been lauded as a model for developed nations. Established in 1995, it expanded coverage from 57% to 97% within a year. But as might be expected, this coverage expansion unleashed a surge in utilization, nearly doubling outpatient visits, hospital admissions, and use of ED services among the previously uninsured. Since then, growth in outpatient visits, ED visits, and surgeries has vastly outpaced overall population growth.

To date, Taiwan has addressed the cost containment problem partly through aggressive price setting—sometimes below the cost of providing those services. Yet ironically, this has pushed providers to rely on increasing utilization as their only survival lever. This supply side-induced demand, along with low co-pays, no gatekeepers, and the political difficulty of raising premiums has created a financial situation where NHI expenditures have outpaced revenues almost every year since 1998.

Price controls will likely only work in the short term. In the long term, the NHI will need to alter its incentives to reign in over-utilization while encouraging greater provider efficiency, much as BCBS has done in Massachusetts. Shifting to a DRG-based payment system by 2015 is a good first step.

We concluded our conversation with a pronouncement that struck me: “China’s health system is about 20 years behind Taiwan’s in its evolution, so I think it can learn a lot from Taiwan’s experience.”

Marching Toward Cost Escalation in China

There’s a lot of wisdom in that statement. To date, most reform efforts in China have focused on expanding access, particularly in rural areas. As described in this UNICO report, insurance coverage in rural China had plummeted from 90% of the population to less than 10% with the collapse of the commune system in the 1980s. In the last decade, through a series of programs and reforms, China achieved 93% insurance coverage nationally, and just announced this past August that it had achieved 99% rural insurance coverage. While the accuracy of the numbers can be disputed, there’s no doubt that a lot more people now have access to health care services.

Which raises the specter of cost escalation in China’s not too distant future. Alarmingly, insurance expansion in urban China has been found to lead to such supply-side demand inducement (e.g. unnecessary treatments, expensive technology) that getting insured can actually increase one’s financial risk. Furthermore, China’s current insurance schemes have been criticized for being too narrow in scope (not enough procedures covered) and depth (not enough reimbursement). If China deepens the value of its existing benefits (as is much needed), we could expect demand to surge even higher.

Seek Truth from Facts

I’ve breezed through a lot of details to keep this post manageable, and for those who are interested, there’s a wealth of information in these papers on the reforms in Massachusetts, Taiwan, and China.

But the experience of all three shows that upon achieving near-universal coverage, cost containment issues are sure to follow. It would therefore seem like a prime opportunity to seek truth from the facts of the trial-and-error already happening in other countries. As our nation’s health care marches toward a costly ruin, perhaps the time is ripe for a UNICO-like study series on cost containment.

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China’s Third Plenum: Reform is Coming

This past week, Washington was gripped with President Obama’s surprise announcement that you can really keep your health care plan, period. Halfway across the world, China and China-watchers were gripped with another set of announcements:

The results of the Third Plenum of the 18th Central Committee of the Chinese Communist Party (CCP).

So What in the World is a “Third Plenum”?

The Plenary Sessions are meetings of the Central Committee, a subgroup of the National Congress. The Third Plenary Session (“Third Plenum”), which occurs once every five years, is the meeting during which leaders introduce new economic and political reforms. This year’s Third Plenum opened one week ago (Nov 9) and ended last Tuesday (Nov 12).

(For more details, here’s a great explanation of the Plenary Sessions, complete with infographic.)

To underscore the importance of this past week, it’s important to understand what’s happened during prior Third Plenums (Plena?):

  • In the 1978 Third Plenum, Chairman Deng Xiaoping consolidated power, introduced radical economic reforms that propelled China’s remarkable economic growth, and implicitly attacked the cult of Mao, repudiating the Cultural Revolution.
  • In the 1993 Third Plenum, Premier Zhu Rongqi announced the socialist market economy (no contradiction there) and loosened China’s state-owned sector.

So it’s no surprise that analysts excitedly awaited the results of this year’s Third Plenum, especially notable for being timed with the first year of Chairman Xi Jinping’s rule.

They Were Disappointed…Prematurely?

Shortly following the conclusion of the Third Plenum, the CCP released a vaguely-worded communiqué through Xinhua, its state news agency. It was immediately attacked for being heavy on jargon and short on specifics, tempering its promises of economic and political reforms with repeated nods to the “leading role of the state-owned economy”.

Notably, what the communiqué did not mention included:

  • No mention of financial sector liberalization (the Swattie in me wonders if this is necessarily a bad thing)
  • No push for further urbanization (likely because this would require overhauling the age-old hukou system)
  • No indication that President Xi would take on the state-owned enterprises (which dominate China’s oil, aluminum, coal, banking, telecommunications, electricity, transportation and other fields)

Immediately following the release of the vague communiqué, global stocks dipped, headlines called the Third Plenum “disappointing” and “a dud”, and analysts called previously optimistic expectations “sanguine and naïve”, claiming they overestimated Xi and Beijing’s actual power over the rest of the country.

But in the best post-communique analysis I’ve seen, Zachary Keck at The Diplomat argues that disappointment with the Third Plenum is premature. And precisely because it lays the groundwork for helping Xi consolidate enough power to drive through subsequent reforms.

Specifically, the communiqué created two new political bodies that helps Xi consolidate power:

  1. A new state security committee, analogous to the U.S.’s National Security Council. As Keck argues, this new committee is likely meant to “ensure stability as the reforms progress”, which bodes poorly for human rights, but signals the CCP is serious about implementing reforms.
  2. A central leading group reporting directly to top leadership, rather than to the government. This would assist Xi in pushing through reforms by sidestepping the bureaucratic red tape—precisely addressing the problem of limited central power that Beijing faces.

Hot off the Presses: A Blueprint for Reform

And right on cue, the CCP released a new blueprint for reform yesterday, with many more details on specific reforms. These include:

  1. Loosening of the one-child policy. Urban parents can now have two children if either spouse is an only child (previously, both had to be only children).
  2. Abolishment of labor camps, which have been used to imprison people for up to four years without formal arrest or trial. (Unclear how heavily this will be enforced in practice.)
  3. Strengthened rural property rights, allowing farmers to gain more profit from land sales to local governments (hopefully resulting in fewer of these).
  4. Loosening of the hukou system, which may eventually alleviate social and health care access issues for migrants.
  5. Economic liberalization and reforms. A system for insuring back deposits, fewer restrictions on offshore securities investments and M&As, looser pricing controls for energy, water, and telecommunications, and other financial changes I’m not well-versed enough to understand.
  6. Environmental protection-based growth incentives. Specifically, local governments wouldn’t be judged on economic performance alone, but also on environmental protection efforts. That’s cool.

And finally…accelerated health reform. Overhaul of public hospital system, more community hospitals, changes in doc pay, and catastrophic health insurance. I hope to explore the details more in a later post, but for now, this great interview with Shanghai’s former mayor Shen Xiaoming about health reform in Shanghai may provide some indication of where China’s health system is headed.