The bill for Hoosiers’ excess health care spending: About $5 billion per year

November 11, 2013
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Indiana prides itself on its low cost of living. But when it comes to health care, this is an expensive place to be.

Hoosiers' poor health, combined with an aggressive health care system and an uncompetitive health insurance sector, means Hoosiers, in spite of the fact that they earn just 86 cents for every dollar earned by the average American, are spending nearly $1.13 on health care for every dollar spent by Americans.

If Hoosiers simply spent the same percentage of their incomes on health care as average Americans, they would save a whopping $5 billion.

That's what I found by comparing federal data gathered on the health care expenditures of residents in every U.S. state. The data, released by the Centers for Medicaid & Medicare Services, can be found here.

CMS, as the agency is called, tallied Hoosiers' health spending in 2009 (the most recent year available) at $42.8 billion. That level of spending equaled 20 percent of the total personal income in the state that year. But nationwide, health care spending accounted for just 17.6 percent of total personal income.

So I calculated how much Hoosiers' would save if they spent only 17.6 percent of their annual income on health care. The answer? $37.8 billion--which is $5 billion less than Hoosiers actually spend each year. That's $780 per person.

To see my efforts to explain why health care spending in Indiana is high, go here, here and here. The short answers are: 1) Hoosiers are fatter, sicker and older than the nation; 2) Hoosier health care providers, especially the hospitals, are in general overpriced and aggressively pursue high utilization of their services; and 3) Indiana's health insurers, especially Anthem, have been more concerned about market share than about actually holding down the cost of medical care.

But in this post, I'm going to concentrate on who's getting the extra money and who's paying for it.

To answer that first question, I examined how much of their incomes Hoosiers are spending on each category of health care and then subtracted out the amount they would be spending if they were spending the same percentage of incomes as all Americans. The remainder is the amount of excess spending for each category.

(I'll note at this point that the CMS data does not include money spent on health insurance administration. Nationally, this figure is 6 percent. It's probably higher in Indiana, if for no other reason than the fact that insurers are processing more and larger claims. Also, the market dominance of Anthem Blue Cross and Blue Shield, even though it is not unique to Indiana, may allow it to command higher levels of overhead and profit. But I have no data to verify or rule out that possibility.)

So, without further ado, here is where Hoosiers' excess health care spending ends up:

Hospitals: $3 billion

Nursing homes: $1.1 billion

Drugs: $595 million

Doctors/Clinicians: $583 million

Medical devices: $149 million

Math whizzes will immediately notice that these amounts add up to more than $5 billion. That's partly due to rounding. But it's also because Hoosiers spend a whopping $422 million less than the national average on home health care (which, given the high nursing home spending, raises an interesting policy issue) and about $10 million less on "other" health care services.

So who pays for all this spending? The short answer is, we do--through federal and state taxes, and through higher health insurance premiums. But here's the additional detail, anyway.

The biggest chunk, 45 percent, is shouldered by private payers--employers and individuals. Collectively, they paid nearly $2.3 billion more than they would have is Hoosier health care spending were on par with the national average.

The federal government, through the Medicare program for seniors and through its share of of the Medicaid program for the poor, pays an extra $2.2 billion in Indiana--or 44 percent of the total excess.

The state government, through its share of the Medicaid program, pays an extra $534 million than it would if Hoosiers' health care spending were the same as the national average. That's nearly 11 percent of the excess.

Even if we exclude the federal spending, Hoosiers are directly forking over nearly $2.8 billion a year--or $434 per person--for health care spending that the average American doesn't have to spend.

For a family of four, like mine, that's enough money to pay for a decent vacation. And for a state that has been slipping further and further behind its national peers in wealth, it's a bill that is beyond unaffordable. It's just wasteful.

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  • I'm confused...
    JK, why do you think the cost of health care is or should be proportional to a patient's income? Shouldn't the issue be the extra $0.13 above national norm? If Indiana health care costs were equal to national norms, costs would still be disproportionately high based on income if Hoosiers only make 86% of the national average. If wages fell to 80% of the national average and health care dollars spent remained constant, costs as a percentage of income would exceed the 20% you cite in your post, which, according to your "logic," would indicate increasing health care costs despite constant spend. Second, how is Anthem's interest in maintaining market share inconsistent with cost control? Do you think Anthem sells more policies by paying providers high rates and charging employers higher premiums? I submit that Anthem maintains its market share by paying the lowest rates to providers and selling lower cost products as a result. Finally, you state Hoosiers are directly forking over $434 per person each year for excess health care spending, an amount that for a family of four, like yours, is enough money to pay the mortgage on a second home. Where can I buy a second home for a family of four for a mere $145 per month ($434*4/12)?
    • To CJ
      First of all, thank you for catching my math error on buying a second home. I was translating the savings into a monthly figure, when that was clearly wrong. I have changed my post to be correct now. As to your other points, since 60 percent of the operating expenses of hospitals is for personnel costs, the actual cost to deliver care is closely connected to prevailing wages and incomes. The federal Medicare program acknowledges as much in how it sets its payment rates to hospitals. Furthermore, nearly every other business sets prices and expected sales volumes of its services based on the amount of customers' (in this case, patients') incomes it thinks it can reasonably command. Why should health care, a very locally focused industry, think it can charge prices or sell volumes that exceed the available incomes of the customers in its local area? Now, a big part of health care spending in Indiana, as I wrote, is because of higher need due to poorer health. That part of the equation is not the fault of health care providers or drug companies or device makers. But it certainly does mean Hoosiers are poorer in other the other areas of their lives to the extent that they spend beyond their wages for health care. Would you argue otherwise?
      • To CJ, Part 2
        As for Anthem, I think the evidence on excess hospital pricing, which I have written about several times this year, is strong evidence that while Anthem may secure a larger discount than other insurers, it has not slowed health care pricing in Indiana relative to other insurers in other states. The largest discount off a steadily rising base translates into steadily rising costs/prices.
      • Overpriced Hospitals?
        In reference to " 2) Hoosier health care providers, especially the hospitals, are overpriced", note that Medicare pays a base amount that is consistent across all inpatient hospitals (before modifiers such as DSH and IME payments, wage index, etc...). For this relatively large customer segment, it doesn't matter how overpriced a hospital is - Medicare pays the same amount. This does not entirely negate your point, but it certainly diminishes it's impact. If I'm comprehending your post correctly, your list of "who's getting the extra money..." is potentially misleading. It would seem to be a list about overutilization more than a list about who's pocketing the money. Perhaps the margin of the entities you listed will be more insightful about whose pocket the "extra money" is ending up? I strongly suspect it is not the nursing home.
        • To Mr. Overpriced Pockets
          You raise a good point, which I failed to make sufficiently clear. By using the word "aggressive" in the beginning of my post, I meant to assert that health care providers, especially hospitals, pursue both high prices and high utilization. But in my three-point explanation lower down, I failed to make clear that I was talking about both prices and utilization. High utilization cannot, of course, be blamed entirely or perhaps even mostly on the health care providers themselves. But they deserve some of the blame. High utilization does lead to more spending overall, even among Medicare patients. And health care providers have proven themselves quite adept at figuring out which procedures they can profit from under Medicare, and then promoting them heavily. IN the past decade, there was heavy promotion and building around orthopedics, interventional cardiology and cancer--because all were reimbursed well under Medicare. I'm very little concerned about profit in this post because I have no evidence that profits of various health care sectors are higher in Indiana than in other states. But spending is higher here, than the rest, and that is a fact that makes Hoosiers collectively poorer than their American peers. In my view, that's a problem.
        • How Could ACA and Expanded Medicaid Help Bring Down Costs
          Good article and good commentary. They both show just how complicated and multifaceted the health care system and its related costs are. I am trying to figure out how the ACA implementation and potential expansion of Medicaid under ACA would impact costs. It would seem that they would reduce hospital costs and insurance costs due to the requirement that at least 80% of premiums go to health care service (or, in other words, administrative costs cannot exceed 20%). Any thoughts on this JK or anyone else?
        • Clarification
          In my previous comment and ending question, I should have been more clear in that I see ACA and expanded Medicaid having at least 2 impacts: (1) reducing hospital costs due to fewer people using the emergency room as their primary physician and (2) holding administrative costs of insurance companies to no more than 20% of paid premiums.
          • To Jim F.
            My apologies for not responding to you earlier. I hold very modest hopes for the expansion of Medicaid to lead to any significant reduction in costs. Why? Because hospitals have, over their history, maximized revenue and spending whenever they could. They have little incentive to pass on any savings achieved in lower ER use to private payers--unless the private payers force them to. (See this earlier post of mine: http://www.ibj.com/the-dose-2013-10-31-the-frightening-future-thats-haunting-hospitals/PARAMS/post/44361). But it does appear that private payers, spurred on by Medicare, are indeed forcing hospitals to reduce spending. That will moderate costs. It may also produce care environments that we do not like--unless health care providers find ways to truly increase their productivity, which they have no reliable track record of doing. But maybe they can really break out of their bricks and mortar mindset and start trying to using IT to manage chronic diseases and prevent hospitalizations.
          • Yes, I'd argue otherwise
            True, with ~60% of hospital costs attributed to hospital personnel costs, hospital pricing must account for personnel costs. But you assert the premise that the reasonableness of hospital prices is somehow tied to patient incomes. By that logic a $1,000 unit of service in Carmel (a high wage area) might be reasonable but the same unit of service (assuming the same input costs for the hospital) would be excessive in Center Township. I submit that reasonableness in hospital pricing should be measured based on cost inputs and not consumer income levels. Second, I challenge the assertion that Medicare sets its payment rates based on patient income levels. In fact, CMS establishes a federal base rate for all hospitals with certain hospital-specific adjustments for bad debt expense, medical education, disproportionate care for the indigent and, yes, relative hospital wages. CMS does not adjust Medicare payments based on patient income levels (except to the extent lower patient income levels increase bad debt or disproportionate share adjustments). Finally, Anthem and other payers have been constaining hospital pricing over the past few years, much more so than you give credit. But unless and until employers are willing to exclude providers from their employee offerings (like had been the practice in Indianapolis during the early and mid-1990s), every hospital is a "must have" and every hospital will seek to cover its full costs and replacement margin in payer negotiations.

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