Why Cutting Health Costs Is Really Hard

09/10/2009 12:50 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

In his address to a joint session of Congress Wednesday night, President Obama tackled the biggest obstacle to passage of health care reform: cost.

The plan has been losing ground since the release of a Congressional Budget Office study in June, which said the proposed reforms would be far more expensive than the administration projected.

But in his speech Wednesday, the president said the plan he supports would cost $900 billion over the next decade, cheaper than earlier proposals. (Only in Washington, DC can the words “$900 billion” and “cheaper” appear in the same sentence.)

And he vowed: “I will not sign a plan that adds one dime to our deficits either now, or in the future. Period.”

So, how will he pay for the additional coverage of tens of millions of Americans? “By finding savings in the existing health care system—a system that is currently full of waste and abuse,” the president said. Estimated savings: “hundreds of billions of dollars.”

But excuse me, Mr. President, isn’t that what all politicians say when they really don’t have a clue how they’re going to cut spending?   

That’s what the brouhaha this past summer has been about: Older Americans are frightened they will lose care so others can get coverage. Along with growing fears about out-of-control deficits and massive government involvement in the economy, this political battle has been a generational one—between the older “haves” and the younger “have nots.” Hence, all the paranoia about “death panels,” which the president called “a lie plain and simple” in his address.

Trouble is, cutting medical costs is very, very difficult. Even if the most cold-hearted government bureaucrat wanted to reduce expenses by denying care for seniors, he or she would find it hard to do so.

The reason: A surprisingly large number of seniors already are rationing their own care. And as they get older—say, beyond 75—per capita Medicare expenses actually go down, not up. Yes, you read that right.

Dr. Steven Miles, a professor of medicine and bioethics at the University of Minnesota Medical School, is also a practicing internist and geriatrician. He has studied end-of-life care issues extensively.

He likes to ask attendees of his presentations what percentage of all US deaths come after voluntary withdrawal or withholding of life-sustaining treatment. Is it 10%? 20%?

Wrong! More than 80% of all US deaths—1.8 million out of a total of 2.2 million each year—come after a person or his or her family opts not to take measures to “save” the dying patient. That’s an amazing number, especially since only 40% of Americans have living wills.

“We have a system in which people express their preference to not be maintained on life support,” Dr. Miles says. “We’re talking about a voluntary reallocation [of resources on a national scale].”

So, maybe the free market in health care is working—at least in this area, as individuals make rational decisions about how to use scarce resources.

“Grandma is pulling the plug on grandma,” says Dr. Miles. “They don’t want to be maintained in an uncomfortable state, [and] they don’t want to impoverish their loved ones.”

But if 80% of Americans are already choosing to have care withheld in their last months of life—when patients incur a huge chunk of medical expenses—that means we can’t wring much more savings out of this area.

In a 1993 study, the New England Journal of Medicine estimated that even universal use of hospice care and advance directives such as living wills would reduce medical costs by only 3.5%. That’s about six months of health care cost increases at the current pace.

“All of the low-hanging fruit has been picked,” Dr. Miles says.

In fact, some experts have challenged the widespread belief that expensive end-of-life medical expenses are bleeding the system dry. In an influential 1994 study, “The High Cost of Dying Revisited,” researcher Anne A. Scitovsky wrote:

“The data do not support the often-voiced hypothesis that the rise in medical care costs is due largely to the disproportionate use of high-technology medical care by persons who die.”

In fact, she found that “the intensity of care, as indicated by hospital expenditures, declines with age.”

True, medical care in the last year of life represents 27% of annual Medicare expenditures and 11% of all US health care costs. But it actually falls dramatically from over $10,000 a year in per capita Medicare expenses for people aged 65-74 down to slightly more than half that amount for people over 85, according to a 2001 study in the Journal of the American Medical Association. 

Why does that happen? Principally because much older people are more likely to be treated in nursing homes or hospices where medical costs are far lower (and where there are more limits on Medicare coverage) than in pricey hospital intensive care units.

That means this is as much a demographic problem as it is a policy issue. As more people turn 65 and as medical advances prolong life, medical expenses will keep going up and up, particularly in that 65- to 74-year-old cohort that is treated more frequently in hospital ICUs.

And short of completely revamping the standards of care and treatment regimens—a move the president wisely said was not the government’s job—there’s very little we can do to slow the rise of those costs.

It’s not just a problem here. According to the United Nations, the percentage of the elderly population will nearly double to 26.8% of the population of developed countries by 2050, while it’s expected to nearly triple even in developing countries, to 14%. 

Japan is already dealing with the problems of an aging population. We and western Europe and even China will be next. This problem—how to provide good, humane health care for the elderly—will strain the world’s health care systems, wreak havoc with national budgets, and may well be the defining issue for the next generation.

Demographics is destiny. Cutting all the fraud and waste in the world won’t change that, nor will taxing the rich or sticking it to medical providers on reimbursements. Short of big changes in behavior and medical practice well beyond what’s envisioned in any of the bills currently before Congress, we taxpayers will simply have to get used to paying more for some time to come.

Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.

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