Does the VA Cost Less Than Private Health Care?

Taking a break from law, this post is about whether the Veterans Health Administration provides care more efficiently than the private sector.  Paul Krugman and others have held the VA out as a shining example of the government’s ability to provide high quality care efficiently, as well as the private sector’s need to lower costs and improve quality through electronic medical records, comparative effectiveness research, reduced overhead, salaried physicians, and integrated delivery systems — all issues that are central to current health reform debates.  It would be a huge blow if it turns out none of this is true — but that’s precisely what’s suggested by an article published by VA researchers earlier this year.

Wm. Weeks, MD (at Dartmouth and the VA’s regional  center) reported that, from 2001-2006, the VA cost 33% more than equivalent care in the private sector, and its quality was not notably better.  Here, I focus on the cost findings, since they diverge dramatically from the prior, state-of-the-art, study by Nugent, Hendricks et al (also from the VA), which found that, in 1999, the VA cost about 20% less than Medicare.  Since Medicare itself costs 25-30% less than the private sector, Dr. Weeks reports the VA costs about twice what Dr. Nugent and other VA colleagues  previously reported.  What makes this discrepancy even more remarkable is that Weeks did not even cite this prior work of VA colleagues, published in multiple articles in leading journals.

What gives?  I’m not expert, but its clear their methods differed sharply.  Nugent et al. took all care delivered at 6 VA centers and valued the services at actual Medicare fee-for-service rates, comparing the total with costs borne by the 6 VA centers.  Thus, the measures and comparison are direct, apples-to-apples.  Weeks, on the other hand, compared total VA medical costs (excluding nursing homes) per user with per person costs reported by VA users in the Medical Expenditure Panel Survey (MEPS), which values those services at private sector rates.  MEPS is a national survey that contains only a small subsample of 500 VA users, about 1 of every 50,000 VA user.  Extrapolating from such a small sample is a much more indirect comparison, so merits closer scrutiny, which reveals many potential flaws:

1. The 500 VA users in MEPS  are probably not an accurate reflection of 5 million total users.  MEPS surveys people living at home who respond to surveys.  This entirely excludes people who are homeless, institutionalized, or have died earlier in the year, and it under-represents mentally ill or substance abusers.  All of these categories have worse health, and regrettably are prevalent among vets, so MEPS almost certainly omits vets who reflect the highest burden of illness.
2. This sample may lacks much statistical validity, even for the vets it does include.  MEPS weights responses to make them nationally representative for demographic characteristics, but not for veteran status.  Without this weighting, the chance of random error is much greater.  This is suggested, for instance, by the fact that the value of VA care reported over this six-year study ranged two-fold from year to year, with no discernible pattern (the sixth year was twice the fifth year, which was half the third year, etc.)
3. Even for those whom MEPS does represent, it underreports actual health care costs.  Exactly how much and why is somewhat unsettled, but what seem to be the most recent studies conclude that MEPS underreports by 14% - 19%, in large part because reports of both utilization and costs are understated.    Weeks acknowledges these possible flaws, but asserts that studies he and others have done show MEPS is reasonably accurate — again without citing any of the leading studies to the contrary.

Moreover, even Weeks’ self-selected cites do not fully support his accuracy claim.  For instance, he says a RAND study reports that “MEPS expenditure estimates ‘agree quite well’ with estimates from other databases.”  But, the RAND study (p. 34) spoke in that phrase only to utilization, not to expenditures, and even for utilization it said MEPS underreports by 85% for outpatient hospital use.  For expenditures (use X price), RAND (on the very next page) said that MEPS underreports hospital costs by 21% and physician costs by 54%.

What is this Journal of Health Care Finance that would publish a flawed use of MEPS?  It is hardly a leading health research journal.  According to its website, it is

devoted solely to helping you meet your facility’s financial goals. . . . Make easier, better decisions, with advice from industry experts. . . .  Experts in the field share their experiences on successful programs, proven strategies, practical management tools, and innovative alternatives, . . . including hospital/physician contracts, alternative delivery systems, generating maximum margins under PPS, improving productivity, taxation management, health care insurance, employee benefit cost-containment, joint ventures, mergers and acquisitions, employee incentive systems, and more.

An e-mail from its editor states that most articles are reviewed only internally, by its editorial board whose members are drawn primarily from industry.

It appears the Weeks article did not receive peer academic scrutiny, but what about scrutiny from the study’s own coauthors, who are affiliated with Dartmouth and Washington & Lee?  The second author happens to be Weeks’ wife, and the third appears to be their son.  As for Weeks himself, he is deeply embroiled in two serious legal controversies with the VA.

On balance, the Nugent, Hendricks et al. study remains unrebutted. In my view, the Weeks study suffers from too many serious flaws, and is too lacking in objective critique, to hold much or any credence in this important debate.

Originally posted at the O’Neill Institute for National Global Health.

Is it Unconstitutional to Mandate Health Insurance?

Is it unconstitutional to mandate health insurance? It seems unprecedented to require citizens to purchase insurance simply because they live in the U.S. (rather than as a condition of driving a car or owning a business, for instance).  Therefore, several credentialed, conservative lawyers think that compulsory health insurance is unconstitutional.  See here and here and here. Their reasoning is unconvincing and deeply flawed.  Since I’m writing in part for a non-legal audience, I’ll start with some basics and provide a lay explanation.  (Go here for a fuller account).

Constitutional attacks fall into two basic categories:  (1) lack of federal power (Congress simply lacks any power to do this under the main body of the Constitution); and (2) violation of individual rights protected by the “Bill of Rights.”  Considering (1), Congress has ample power and precedent through the Constitution’s “Commerce Clause” to regulate just about any aspect of the national economy.  Health insurance is quintessentially an economic good.  The only possible objection is that mandating its purchase is not the same as “regulating” its purchase, but a mandate is just a stronger form of regulation.  When Congressional power exists, nothing in law says that stronger actions are less supported than weaker ones.

An insurance mandate would be enforced through income tax laws, so even if a simple mandate were not a valid “regulation,” it still could fall easily within Congress’s plenary power to tax or not tax income.  For instance, anyone purchasing insurance could be given an income tax credit, and those not purchasing could be assessed an income tax penalty.  The only possible constitutional restriction is an archaic provision saying that if Congress imposes anything that amounts to a “head tax” or “poll tax” (that is, taxing people simply as people rather than taxing their income), then it must do so uniformly (that is, the same amount per person).  This technical restriction is easily avoided by using income tax laws. Purists complain that taxes should be proportional to actual income and should not be used mainly to regulate economic behavior, but our tax code, for better or worse, is riddled with such regulatory provisions and so they are clearly constitutional.

Arguments about federal authority deal mainly with states’ rights and sovereign power, but the real basis for opposition is motivated more by sentiments about individual rights - the notion that government should not use its recognized authority to tell people how to spend their money.  This notion of economic liberty had much greater traction in a prior era, but it has little basis in modern constitutional law.  Eighty years ago, the Supreme Court used the concept of “substantive due process” to protect individual economic liberties, but the Court has thoroughly and repeatedly repudiated this body of law since the 1930s.  Today, even Justice Scalia regards substantive due process as an “oxymoron.”

Under both liberal and conservative jurisprudence, the Constitution protects individual autonomy strongly only when “fundamental rights”  are involved.  There may be fundamental rights to decide about medical treatments, but having insurance does not require anyone to undergo treatment.  It only requires them to have a means to pay for any treatment they might choose to receive.  The liberty in question is purely economic and has none of the strong elements of personal or bodily integrity that invoke Constitutional protection.  In short, there is no fundamental right to be uninsured, and so various arguments based on the Bill of Rights fall flat.  The closest plausible argument is one based on a federal statute protecting religious liberty, but Congress is Constitutionally free to override one statute with another.

If Constitutional concerns still remain, the simplest fix (ironically) would be simply to enact social insurance (as we currently do for Medicare and social security retirement) but allow people to opt out if they purchase private insurance.  Politically, of course, this is not in the cards, but the fact that social insurance faces none of the alleged Constitutional infirmities of mandating private insurance points to this basic realization: Congress is on solid Constitutional ground in expanding health insurance coverage in essentially any fashion that is politically and socially feasible.

Mark Hall
Professor of Law and Public Health
Wake Forest University School of Law

Price-Gouging by Doctors and Hospitals

Mark A. Hall, Professor of Law and Public Health, Wake Forest University

Carl E. Schneider, Professor of Law and Internal Medicine, University of Michigan

[Ed. note: As noted above, we are very pleased to welcome Professors Mark Hall and Carl Schneider to the blog today.]

We cannot reform health care intelligently unless we understand the medical marketplace well. Debates about reform have scrutinized the health-insurance market, but they have neglected a crucially defective feature of the medical marketplace — the way doctors and hospitals charge patients when prices are not set by regulation or by negotiation with insurers.

The Problem

When patients are not protected by large private or public insurers, doctors and hospitals charge them astonishingly more than patients with Medicare or managed-care insurance.  Some price difference would make sense, because insurers offer providers large volume and economies of scale.  But we are not talking about discounts of 10, or 20, or even 30 percent.  Providers routinely double, triple, or even quadruple prices for unprotected patients.  Such huge mark-ups can only be regarded as price-gouging — exploiting market power to charge prices virtually unrelated to actual cost or market value.

A comprehensive analysis of data hospitals report to Medicare shows that, on average, hospitals charge uninsured patients two-and-a-half times more than they charge insured patients and three times more than their actual costs.  In some states mark-ups average four-fold.

Data for physicians’ prices are less comprehensive, but information from office management systems is disturbing.  Across a range of diagnostic and invasive specialty services (echocardiography, coronary catheterization, liver biopsy, upper GI endoscopy, circumcision, flexible sigmoidoscopies, hysterectomy, appendectomy, gall bladder removal, and arthroscopic knee surgery), many physicians in 2003 charged uninsured patients roughly two to two-and-a-half times what insurers paid.  Only primary care physicians appear to be staying within plausible bounds.  They typically charge uninsured patients only one-third to one-half more for basic office or hospital visits than they received from insurers.

Some Excuses

Providers defend themselves in several ways.  First, they call these price differences steep discounts rather than huge mark-ups.  This is almost laughable.  Most providers charge “list prices” to only a small minority of patients (10-20%), so these are hardly a genuine baseline.  Second, providers argue that because they often cannot collect list prices, they are on balance receiving little more than they would receive from insurers.  However, when patients cannot pay inflated bills, doctors and hospitals regularly send them to collection agencies, ruining patients’ credit and bankrupting millions of them.

Third, providers blame the government by claiming that program and accounting rules require them to bill this way.  But governmental agencies have declared that this is not true, and while some rules may still be irksome, rules about billing certainly do not require providers to set their prices as high as they do.  Many tax-exempt (non-profit) hospitals recently wilted under scrutiny and adopted sliding-scale policies for low-income uninsured patients, but these policies do little to help insured patients who are receiving care out-of-network or uninsured patients from the broad middle class.

The Solution

Insurers’ attempts to stop price gouging have failed.  Some large insurers have refused to reimburse out-of-network providers for the full amounts they charge on the grounds that those amounts are not “usual, customary, and reasonable.”  But New York’s Attorney General called this “consumer fraud” because patients were left owing the full bill.  Courts have been little help.  Consumer class-action lawsuits have attacked price gouging by non-profit hospitals, but courts have dismissed most of these cases on various technical grounds.

Government regulation has inhibited price gouging, but only for people covered by government programs.  Medicare, for instance, prohibits doctors from charging Medicare patients more than about 10% over Medicare-approved rates.  But inflated pricing still afflicts the uninsured and privately insured people buying care out of network.  Some reformers simply advocate greater price transparency so that patients know better what to expect when seeking care without the protection of insurers.  But transparency will not fix the structural dynamics of market power that allow providers to charge almost whatever they want.

To help medical markets work better, the government should cap what doctors, hospitals, and other providers may charge patients who are not protected by regulated or negotiated discounts.  The details can be debated and refined, but one approach is to cap charges at, say, 150% of a normal reference rate.  The reference rate could be what Medicare pays, or a weighted average of what larger private insurers normally pay across a region.  Doctors with boutique practices could still charge what they wished for extra concierge services, or perhaps doctors who don’t accept any insurance should be exempted.  Design features are important and tricky, but they should not keep us from setting reasonable bounds within which markets can function.