Good post.

But a quick fix:

Drug costs, conversely, are a big problem, as are hospital costs, and doctor incentives.

A little primer, coutesy of CMS:

Total system cost $2,100B

1) insurance companies-- $150B (includes government admin also)
2) physicians-- $650B
3) hospitals-- $650B
4) drug/medical device companies-- $275B
5) long-term care facilities-- $175B
6) other

Couple that with estimates of maximalcost savings from "negotiated" drug costs to $40B-- they are not a big problem. The big problem, is and will always be, hospitals and physicians. Let's just keep the focus on the most important things-- even if they are harder to demagogue than Insurance and Pharma CEO salaries.

Drug spending has seen the largest growth of any sector in healthcare over the past 10-15 years, though, so a significant percentage of the year over year increase in health care expenditures are coming from the pharmaceutical industry. Obviously physician and hospital payments are a big piece, too, but that doesn't exempt pharma.

I think the insurers are less of a problem than in the past precisely because they've been under attack for 15 year or so. They still have a massive pile of money and all the incentive in the world to siphon off our money from health care and use it to line their own pockets.

Attacking them has gotten us to the point where they're on the defensive, and looking for a tactical retreat. They still have lots of money, but we've reduced its effectiveness. Keep attacking them, and they may retreat far enough to leave the field more or less to us and allow us to create a real health care coverage system.

The administrative costs of private insurance is way too high but I agree that is not the problem. In the big scheme of things, that is nickels. The issue is cost, and what drives cost is the health of our population and the lack of best practice standards of care being applied in this, one of our last great cottage industries. We need standards of care, interoperable health care IT. Medicare can drive this if they choose to.

Administrative costs could be lower, of course, but folks trying to situate those as our central problem as selling snake oil.

I don't suppose you could point us to an old post or something that deals with this more fully?

You need doctors because everyone likes them

Really? Not because they provide an essential service?

Arnold S. Relman, the former editor of the NEJM, writes in his book "A Second Opinion" that with the amount of money that is spent on health care system ($2.1 trillion, as mentioned in the post above), "we ought to be able to obtain universal coverage and good-quality care for all. So why haven't we had those benefits? It is because a large proportion of what we spend is directed toward profits and unnecessary overhead, and management and business expenses (including marketing and advertising), or it is wasted on unneeded or ineffective medical procedures, or is lost to fraud and abuse in billing practices" (113). He estimates that this diversion or resources represents at least one-third of our total health care expenditures, which should be more than enough to provide universal coverage and improve the quality of care. This estimate likely comes from the fact that "as revealed in their annual reports and widely confirmed buy all research on this subject, investor-owned plans take roughly 10-25 percent of the premium before paying providers, whereas not-for-profit plans take only 5 to 10 percent...[and] Medicare, the largest public insurance plan, reports spending less than 3 percent of its total expenditures on administration" (64), in addition to the loss of about 5% due to billing fraud and the unquantifiable additional procedures that doctors perform to benefit further from their fee-for-service reimbursements. Even though Medicare does a lot of its administration through private insurers, that fact surely wouldn’t make up a 7-22% difference.

I agree that rising costs is the fundamental problem of the current health care system, which stems from the commercialization of American health care. I also agree that insurers are, to some degree, expendable, but I think that dealing with insurers remains central to health care reform, because health coverage is way too expensive, as is clear from the enormous losses due to the existence of private insurance companies. For the exact reasons that you mention (that the private insurance “business model basically relies on arbitraging a fractured system, and they desperately resist integration"), private insurance companies have perpetuated the rising costs in health care and must be integrated (or, better yet, consolidated into a single payer) to reduce administrative overhead and prevent the loss of valuable resources to fraud and private profits. These changes could save significantly more money for the system than drug and hospital costs—and I’m not convinced that pharmaceutical companies would be any easier to reform than insurance companies.

The popular liberal ranting about insurers as evil-doers who hate the sick is indeed a misplaced focus, but insurers do play a fundamental role in health care reform.

Ezra,
The single biggest and most-unified opponent to systemic healthcare reform is the insurance industry. By crushing them first, do you really think that anyone else will think it smart to fight reform?

Have to agree with William Smith - insurers are politically important far beyond their financial portion of the system.

That can and probably will change in the future, but you can only get to that future by politically defeating the insurance companies. It's Job 1, whether you like it or not.

Also, insurers are at the heart of administering a system which:

a) Denies people care for ailments they have no control over.

b) Gives some people care but bankrupts them in the process.

Winning those battles is profoundly important, because health care reform isn't just about saving money, it's also about improving the social safety net.

Thirdly, all the quick wins in efficiency savings come out of reducing the insanities engendered by the insurance companies.

In the long run, savings come out of coercing/incentivising doctors and hospitals into improving productivity and by tailoring rationing into some kind of rational state (as opposed to the current irrational state.)

But, again, you can't get to the long run until you deal with the short run insanity. If you don't deal with the way insurers administrate the medical system at the moment, you'll never be in a position to address the productivity challenge.

wiseone wrote, Let's just keep the focus on the most important things-- even if they are harder to demagogue than Insurance and Pharma CEO salaries.

While doctors and hospitals do cost a lot, drug prices have been a major problem in the increases in costs. When prices for the same drug go up 100% in a year, it adds tremendous pressure to the system. People can deal with expensive stuff, but when costs are going up considerably faster than one's paycheck it is much harder.

Even if we cannot reduce the cost of health care, simply containing the cost increases to be in line with inflation would be a huge win. This is why I think drug costs are a big problem. If you cut hospital and doctors' fees in half, but leave drug costs alone, we will be back here in no time at all.

What MattyG said.

Drugs, doctors and hospitals *should* be the biggest part of the costs problem, since they are the things people actually need. "Well, sure administrative costs are high, but they're nowhere near the drug costs!" is a silly argument. The real question isn't cost, but ratio of cost to utility. Not that I think nothing should be done about drug prices. But (most of) the drugs themselves have a very high utility. The utility of "administration" is much lower. The system is over-administered as it is; much of the insurers' costs is caused by the problem of how to make a profit (as the comparison with Medicare shows). And dealing with the private insurers adds substantially to doctors' and hospitals' administrative costs. Relieve them of that, and you should see their prices go down too.

Besides, the whole concept of "insurance" makes no sense with the way health care is used these days. When health insurance was invented, there wasn't a lot that medicine had to offer most people, and a person could reasonably doubt whether she would ever need the big guns. Now we have preventive care, huge advances in keeping people with chronic diseases around, and the probability of a catastrophic event, sooner or later, is close to one. Imagine if instead of food, we bought "grocery insurance," or if instead of clothes, "wardrobe insurance." What effect would that have on the price and accessibility of food and clothing? Health care is just like that, for those of us with kids and/or less than perfect health.

Whatever the utility of middlemen may be, the utility of allowing them to siphon off profit is zero. The country as a whole can definitely afford as much health care as we need; otherwise, we wouldn't have gotten away with diverting so much of the available resources to corporate profits for so long. (At least, not without ability-to-pay based rationing penetrating much farther into the middle class, as it is now beginning to do.) The only real question is whether we have the political will to redirect those resources to where they're needed.

The whole notion of *them* offering *us* a deal is unbearably presumptuous. Kick them while they're down, I say.

Drug spending has seen the largest growth of any sector in healthcare over the past 10-15 years, though, so a significant percentage of the year over year increase in health care expenditures are coming from the pharmaceutical industry. Obviously physician and hospital payments are a big piece, too, but that doesn't exempt pharma.

So this is a common misperception. Drug prices have been among the highest growth elements of health care on a percent basis, but not on an absolute basis. Meaning, if the cost of something goes from $10 billion to $15 billion year-over-year, that's 50% cost growth. That's very high. But it's only a $5 billion increase. The $1.3 trillion-- read that again, folks-- trillion-- that we spend on physicians and hospitals, tends to grow in the high single digits by percentage, every year. That's $50-100 billion every year in new costs. This drives most of the year-over-year overall system cost growth in health care. Drug costs, by contrast, have been growing by low-to-mid double digits historically, on a base of $100-200 billion. That translates into a $10-20 billion absolute increase per year. So that's a $50-100 billion absolute increase in physicians and hospitals, versus $10-20 billion in drug costs. That's a significant five-fold difference.

More importantly, drug costs are slowing down-- on a percentage basis they were lower than other parts of health care spend in the past year-- and this was widely expected. As many high-cost drugs continue to come off patent in the next very years, another $75-100 billion of annual drug costs will be replaced by generics that are a fraction of the cost.

Why is this important?

1. Because for the record, after legislation next year that only fixes costs issues with drugs, there will be a misperception 5 years from on now that the legislation slowed drug costs. That's already happening, and industry analysts have hammered drug stocks because they know their revenues are going away even more the next few years. So its just important to get the facts straight-- drug costs are already expected to slow, if not decline, based on the current system.

2. Drug costs are really the only thing that is frequently discussed when discussing cost control in the political arena. Its largely due to even well-informed people not fully understanding health care economics-- drug costs, while important, are not the first, second or third places we should be focusing on- those would be insurance companies, hospitals and physicians, based on CMS figures.

Imagine if instead of food, we bought "grocery insurance," or if instead of clothes, "wardrobe insurance."
Or imagine if we bought death insurance! Oh, wait.

Fire and automobile collision insurance work because people without a bad event in their life pay for people who do, but life insurance doesn't work that way (unless there's a lot of immortal premium-payers I don't know about). Instead, people who die late subsidize people who die early.

The health care analogy of this is people who use less health care subsidizing people who use more - even though everyone uses *some* health care, as long as they don't all use the same amount, risk sharing still works. (Although we could do without the shareholders, advertisers, and CEOs all taking a percentage.)

Another thing health insurance has in common with life insurance: nobody voluntarily causes a claim. Grocery and wardrobe insurance would be *full* of voluntarily incurred claims; a few people set fire to their houses or wreck their cars for the insurance money, but not that many. I don't know of anyone who would have surgery for the insurance money (especially when it goes straight to the hospital anyway).

The *other* difference between single payer and a big insurance company is that single payer can be funded by taxes that *aren't* allocated strictly on actuarial lines - thus, not only do lucky individuals pay more than they receive, so might healthier and/or wealthier demographics. The desirability of such an outcome is hotly contested.

The people who incur the highest healthcare costs aren't more likely to need it - they're certain to. Hence "pre-existing conditions." The difference with food and clothing is that we're all in the class of guaranteed heavy users, whereas with health insurance only some of us are. In either case, you can't "insure" people who are certain to incur large claims. (Owners of whole life policies are certain to die, but they're not certain to die before paying premiums long enough for the ins. co. to profit. OTOH many people with chronic illness incur ongoing expenses higher than the highest premiums.) The only way such people get coverage now is if they (or a family member) manage to keep working at a good enough job to buy into a group plan, or they become destitute and go on Medicaid. For-profit insurers are prudent to avoid these people in the individual market; stronger steps to protect them should have been taken a long time ago. Now greed, inefficiency, stagnant wages, advances in medicine, etc. have created a situation where the class of people who cannot be insured without automatically wrecking insurers' bottom line has gotten too large to ignore. Trying to work out a way that insurers can actually profit from these people is like trying to square the circle.

Another thing health insurance has in common with life insurance: nobody voluntarily causes a claim.

You've got to be kidding. Ever heard of Viagra? Planned pregnancies? Or how about people stretching their meds or delaying procedures for financial reasons? Short of imminent death, seeking care is "voluntary," and a lot of the inefficiency we see now stems from letting people get pushed to that point.

Ezra, why are you an apologist for these people?

They are the cancer in the system. They take 30% overhead, and distort the entire medical sector.

American Prospect, help! You need a blogger on healthcare reform!

Ezra -

What specifically are you referring to when you say "Medicare relies on private insurers for most of its billing and administrative functions"?

Are you talking about the administrative burdens they put on plan providers (which is well known), or are you talking about some sort of external contracting?

A great post.

And I think you're right, Ezra: people hate insurers because of all of the stories of insurers refusing to cover a treatment.(Even though sometimes, the insurers were right, the treatment would have been futile, while in other cases, they were just trying to save money.)

But insurers are not the cause of our health crsis. They are not driving health care inflatoon; they're just trying to keep up with it, by hiking premiums.

What drives health care inflation? Drug-makers, device-makers, hospitals and some specialists.

Estimates of how much we spend on drugs that use CMS data (see the first comment on this thread by wisewon) capture only the drugs that we buy retail, in the pharmacy.

Drugs admninstered in a doctor's office or the hospital are not included.
These are often the most expensive drugs (i.e. cancer drugs.)

Include them, and drugs and devices account for 16% of the $2.2. trillion we spend on healthcare. Doctors account for 22%, hospitals 32%

And since both the volume of drugs and devices that we use each year and the prices are mounting, drugs and devices are becoming more nad more important as a source of health care inflation.

Total administrative costs for private insurers (to cover their marketing, advertising, underwriting, lobbying, exectuive salaires and profits for investors) equals just 2.5% of the $2.2 trillion pie.

Eliminate the private insurance industry tomorrow, and health care inflation would wipe out the savings in less than a year.

(For explanation see http://www.healthbeatblog.org/2008/11/the-truth-about.html