The Year Ahead

So what will 2008 bring? We certainly can anticipate a hot political debate over the future direction of our health sector, and hopefully this time the candidates will be talking to a better informed and even more skeptical electorate.

Sixteen years ago, voters were swayed by utopian campaign promises that clashed with the hard reality of change and costs. This time, voters will ask tougher questions, and all of the campaigns will need to be prepared with detailed answers and analyses of their own and their opponents' plans.

Getting the rhetoric right is easy. Following it up with the right policy is the hard part. We plan to be very actively involved in these policy conversations and invite you to join along.


What's ahead for the industry?

Our friend Gary Ahlquist of Booz Allen Hamilton sees 2008 as "the calm before the storm" as candidates jockey to make a case for their version of reform. I commend to you his excellent year-end analysis of the health sector terrain.

Ahlquist observes that all of the major candidates recognize the difficulty of sweeping reform. With some assurance, he concludes: "A monolithic new federal approach to the entire health system is not going to arrive on Congress' doorstep early in 2009, since the agenda will already be full with taxation, war funding, and entitlement issues. This is not to say that significant change won't occur; it just will not happen in 2008 or even 2009."

Ahlquist and co-authors Gerald Adolph and David Knott see 2008 as bringing:

  • Continued development of consumer-directed health plans.
  • Joint ventures among payors, providers, and pharma companies to provide better care and better service for major medical problems such as cardiac conditions, joint replacement, cancer, asthma, and diabetes.
  • New opportunities to aggregate catastrophic risk in the individual market and create new "virtual" groups of policyholders.
  • Political debates that begin to chart the multi-year process of future reform.

One of the biggest opportunities they see is improving bedside care, and coordinating care and services throughout a patient's healthcare episode. "Quite simply, the clinical variability and often nightmarish bureaucracy of today's system are problems waiting to be addressed, and those who develop the solutions can expect huge returns," they conclude.

So these experts believe that the market will continue to be ripe for innovation, at least in the near and intermediate terms.


New studies (summarized below) show that national health spending increased in 2006 by 6.7% to $2.1 trillion. One out of every six dollars spent in our entire economy goes to health care. While the numbers are high, the good news is that this rate of growth of spending on most major health services is slower than in prior years.

The biggest growth was in increased Medicare spending, largely attributable to the addition of the drug benefit. Drug prices grew only 3.5% over the previous year, even as spending on prescription drugs grew at a faster rate, largely because more people are getting their prescription drugs following enactment of Medicare Part D. And wasn't that the point? Studies below also show that seniors are more likely to fill prescriptions and are paying less for their medications.

And for consumers as a whole, their out-of-pocket spending continues to fall as a percentage of overall national health spending, dropping to 12% of total expenditures, the lowest ever (and falling steadily from 47% in 1960). When out-of-pocket costs and consumers' share of premiums are included, the direct household share of health spending has remained fairly flat as a share of personal income since 2003.

Moderating health spending coupled with market innovation could temper the urgency for political action on health reform. Policy changes are needed, of course, but if the market can continue to innovate, if consumers have new incentives to seek value in their health spending, and if politicians can keep heavy hands off the regulatory levers for a few more years, we may yet have time to right the ship in our health sector. This could open new opportunities for the market to provide new options for more affordable, more widely available, health coverage and more consumer-friendly health services.

Grace-Marie Turner


National Health Spending in 2006: A Year of Change for Prescription Drugs
Aaron Catlin, Cathy Cowan, Micah Hartman, Stephen Heffler, and the National Health Expenditure Accounts Team, Centers for Medicare and Medicaid Services
Health Affairs, Jan.-Feb. 2008

In 2006, U.S. health care spending increased to $2.1 trillion, or $7,026 per person. The health care portion of the gross domestic product (GDP) was 16%, slightly higher than in 2005. The implementation of Medicare's prescription drug program caused a major shift in the sources of funds used to pay for drugs, resulting in large, one-time impacts in spending growth rates in 2006, including the fastest increase in Medicare spending since 1981 (18.7%), while Medicaid spending declined for the first time (.9%) as drug spending for dual-eligibles was shifted to Medicare. Total private health insurance premiums grew 5.5% in 2006, the slowest rate of growth since 1997. The slower growth was attributable in part to a decline in private health insurance spending for prescription drugs and slower growth in underlying benefits.

The Effect of the Medicare Part D Prescription Benefit on Drug Utilization and Expenditures
Wesley Yin, Ph.D., Anirban Basu, Ph.D., James X. Zhang, Ph.D., Atonu Rabbani, Ph.D., David O. Meltzer, M.D., Ph.D., and G. Caleb Alexander, M.D., M.S.
Annals of Internal Medicine, 02/05/08

In this analysis of more than 6 million unique Medicare Part D enrollees and non-enrollees who were customers of a large national pharmacy chain, the authors found increases in prescription utilization and decreases in out-of-pocket expenditures for persons age 66 to 79 years in 2006 compared with 2005. These estimates of the overall effect of Part D — an approximate 13.1% decrease in expenditures and an approximate 5.9% increase in prescription utilization — are remarkably similar to other predictions of these estimates based on economic theory. The effects of Part D were modest on average but were substantially greater among persons who enrolled. In addition, persons who enrolled earliest had the highest expenditures and utilization before Part D was implemented.
Given their demand for drugs, these persons may have been the most likely to gain from enrollment in more generous Part D plans. The data show that early enrollees experienced the largest decreases in expenditures and increases in utilization.

The New Insurance Frontier
Matthew Collier and Lisa Walsh, Bain & Co.
The Wall Street Journal 01/07/08

For insurers, the greatest source of future growth is selling policies to individuals — not corporations, write consultants Collier and Walsh. Insurers' core business — selling group plans to large employers — is stagnant. A Bain & Company analysis of the health-insurance sector shows that total commercial health-insurance enrollment has been flat around 174 million people since 2001. In response to rising costs, employers have steadily pared back benefits, and the percent of businesses offering health insurance has fallen to 60% last year from 66% in 1999. For insurers, this means that their greatest source of future growth is selling policies to individuals — not corporations. In addition to developing new marketing strategies, new channels and new pricing, insurers also need to equip consumers with the tools necessary to make appropriate insurance and health-care decisions. For the insurance industry, the bottom line is simple. No matter what happens with insurance reform, a new market is emerging. The winners will be those who prepare now for a world where individuals matter.

The Effect of Consumer-Directed Health Plans on the Use of Preventive and Chronic Illness Services
John W. Rowe, Tina Brown-Stevenson, Roberta L. Downey, and Joseph P. Newhouse
Health Affairs, Jan.-Feb. 2008

Despite the exemption of preventive services from cost sharing in many consumer-directed health plans, critics have continued to predict underuse of preventive services, based on the fear that people in a high-deductible plan will reduce their use of all services and will not discriminate between those services that are subject to the deductible and those that are not. This study, which compares people continuously enrolled in Aetna's Health Fund-HRA product with those continuously enrolled in a preferred provider organization (PPO) plan, finds that these concerns are not valid. People enrolled in CDHPs do not underuse preventive services to any greater degree than do those in traditional PPOs. The results thus support the case for "smarter" cost sharing — that is, varying the degree of cost sharing for many types of services according to the effect of the use of the service on future medical costs and future health.

Insta-Americans: The Empowered (and Imperiled) Health Care Consumer in the Age of Internet Medicine
Robert Goldberg, Ph.D., Peter Pitts, Caroline Patton, MA
Center for Medicine in the Public Interest, 01/08

CMPI investigated reports from physicians who indicated they were increasingly seeing patients who were fearful of medications based on information found online. Roughly eight million Americans search for health information online daily. To determine what patients typically see when searching for information on prescription medications, CMPI analyzed Google search results for Crestor, a cholesterol medication, and for Avandia, a type-2 diabetes drug. CMPI found that the information prominently displayed in search engine results was not only misleading and confusing, but dangerous for patients. The analysis of search results revealed that online real estate was dominated by Web sites paid for and sponsored by either class-action law firms or legal marketing sites searching for plaintiff referrals. Other sites were sponsored by groups or individuals selling "alternatives." Online information can add tremendous value for patients when used as a research tool for discussions with a doctor, but users should be aware of the sources of the information they find online and possible ulterior motives of site owners.

2008: Next Steps for Health Savings Accounts
Diana M. Ernst
Pacific Research Institute, 01/08/08

Ernst reviews studies of HSAs and consumer-directed health plans and finds rising adoption rates: A United Benefits Advisors survey, for example, recently reviewed more than 16,000 health plans sponsored by 12,000 employers nationwide. HSAs and HRAs now make up almost 9% of employer plans, versus 6% last year. The survey shows that consumer plan premiums grew less than 3% in 2006, compared with 7% increases for all other plans. Ernst also provides an overview of needed HSA legislation that would, for example, allow HSAs to incorporate FSA and HRA funds, increase the HSA contribution limit, permit the use of accounts to purchase health insurance, and allow veterans to establish an HSA.

Edwards and Organ Transplants
Scott Gottlieb, M.D., American Enterprise Institute
The Wall Street Journal, 01/11/08

Campaigning in the primaries, former Sen. John Edwards is leveraging the tragic story of Nataline Sarkisyan — the 17-year-old California woman who recently died awaiting a liver transplant — to press his political attack on insurance companies and argue for European-style, single-payer health care. But the former trial lawyer is twisting the facts, Gottlieb says. Organ transplantation provides a poor basis to argue that a single-payer system offers a more equitable allocation of scarce resources or better clinical outcomes. The U.S. performs more transplants per capita, giving patients better odds of getting new organs. In 2002, U.S. doctors performed 18.5 liver transplants per one million Americans, significantly more than in the U.K. or France, which performed 4.6 per million citizens, or in Canada, which performed 10 per million. Our system in the U.S. for allocating scarce resources remains imperfect. But taken as a whole, statistics show that organ access, our willingness to transplant the sickest patients, and our medical outcomes are among the best in the world.


Health Reform Lessons Learned: Veterans of 1993-94 Offer Advice to Today's Reformers
Alliance for Health Reform Briefing
Friday, January 18, 2008, 12:15 p.m. – 2:00 p.m. (Lunch included)
Washington, DC

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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