• Democracy, Politics and Institutions
• International Development/International and Global Affairs
• Markets, Business and Government
• Management, Leadership, and Decision Sciences
• Social and Urban Policy

Joseph Newhouse on Healthcare

In the midst of broad economic uncertainty, the cost of U.S. healthcare is one financial concern among many for U.S. policymakers and citizens alike. Professor of health policy and management Joseph Newhouse, an expert on healthcare policy and economics, provides perspective in uncertain times.

Q. How does the current unprecedented global financial upheaval change the possibility and the probability of major healthcare reform in the U.S. in the near future and in the long term?

Newhouse: There are offsetting considerations there. One is that the bailout obviously places more demand on government finances, especially in the short run, making an already difficult budget situation even more difficult. And since any major healthcare reform effort will require money, that will complicate things. On the other hand, if the real economy continues to slow down, I expect the number of uninsured people will rise and that will create political pressure to do something.

In the long run I think there will have to be some kind of reform – both because the historical rate of cost growth is not sustainable and also because I expect the proportion of uninsured to slowly rise.

Q. There have been dire predictions that the Medicare trust fund that covers hospital stays will be depleted in the next ten years and that the aging baby boomers will put a bankrupting strain on the Medicare system. What do you think of these predictions?

Newhouse: First of all, the rate of historical growth in costs cannot really be sustained over the long run or the entire federal budget will be spent on Medicare, so something will have to give. Exactly when it gives – whether its 10 years or 15 years or seven years – is more difficult to determine. It really depends on what happens in the nearer-term, and in particular on what the major advances in medicine are. It depends much more on that than the aging component, which is perfectly predictable.

If, for example, we had a drug come on the market in three years that treated Alzheimer’s disease, that would have a major effect – could be up, could be down – depending on what the drug costs, how many people it was indicated for, and so forth.

Q. The Medicare Prescription Drug Benefit has been in effect for nearly three years now. At the time of implementation there were many concerns: that it would increase Medicare costs astronomically, that it was confusing, and that without the ability to negotiate pricing, it was a give-away to the pharmaceutical industry. How many of those predictions have played out? How does the Drug Benefit fit in to any future plans for reforming Medicare?

Newhouse: First of all, I think that Medicare was long overdue for a drug benefit. People under 65 with standard commercial insurance typically had a drug benefit. Drugs are an important part of modern medicine. Some of them are very expensive. The elderly take a lot more drugs than people under 65, exposing them to financial risks. So a Medicare program without a drug benefit was really a program with one hand tied behind its back. The real question is how that program should pay for drugs, which gets to the question, should it negotiate prices?

I’ve always taken the expression “negotiate prices” as code for “set prices.” And I have a somewhat nuanced view here. For many drugs or classes of drugs, for example antihypertensive drugs, there is competition in the market. There are generics. As a result, the market functions pretty well, so I don’t see a need for the government to negotiate price or to set price.

Where there is a problem is with a relatively small number of drugs, but they’re very important. And this is a case where a new kind of drug comes on the market that doesn’t have much competition. Think of a drug that might be used to treat some cancer that currently isn’t very treatable. The fact that that drug is now insured means that the drug maker can potentially ask a very high price for it, and potentially hold up the government for some very high profits, which makes one think, maybe the government should set a price in that case.

The problem is that may discourage potential investors from investing in R&D necessary to bring the drug to market. In the case of the biotech industry for example, most of the capital for research and development comes from venture capital, and if they think they’re not going to get a commensurate return on the money they put in, they’ll put their money in some other investments, for example in IT, and we’d never have the drug in the first place. So this really is quite a difficult problem.

On the whole I would say the drug benefit has worked reasonably well. There were certainly initial implementation problems, but those are behind us. I think there are probably too many drug plans so that the drug benefit is probably overly confusing to many elderly. There are some more technical fixes that could be made in the drug benefit, but on balance it is a very good thing that we have it.

Q. You have written that in some respects the rise in healthcare costs hasn’t been all bad. Please explain.

Newhouse: In my view the rise in healthcare costs has brought with it benefits that have exceeded those increased costs. Whenever the subject of medical care costs is brought up, there is often a “sky is falling” tone about the discussion, and the issue should really be, did we get the money’s worth from the increase? I should say I have no doubt that we do not get our money’s worth in the U.S. compared to the value that other countries get from what they spend, but that is a different issue than what the increase has bought.

So the increase in costs, for example, has kept people with kidney failure alive. We have people walking who have artificial hips and artificial knees who would have great difficulty walking without those. We have drugs to treat depression, which we didn’t use to have. The death rate from cardiovascular disease, the major cause of death, has fallen by almost a factor of two over the last 50 years. That fall is responsible for most of the gain in life expectancy over that time, and that’s in considerable part due to drugs to treat high blood pressure and drugs to treat high levels of cholesterol. We’ve had a revolution in molecular biology and sequencing the genome, and we’ve yet to see the fruits of that play out in the ability to treat diseases, so I expect this increase in value from more medical spending could continue.

We’re now saving premature babies at reasonable frequency whose birth weight is well under 1000 grams, and that’s due to investments in things like neonatal intensive care units that have added considerable value.

So the rise in costs has bought us a great deal. Not only us, however. It has brought every society that kind of value. And my concern is really that simplistic attempts to “contain costs” may well end up surrendering some of the potential gains that we may see downstream.

Q: What are the most significant challenges in the healthcare field facing policymakers over the next decade?

Newhouse: There are three broad topics in healthcare reform. One we’ve touched on here is costs. We cannot sustain the historical rate of cost increase, but we don’t know a lot about sensible ways to change that rate without giving up in benefits more than we’re saving in costs. We know we have to address this problem, but we don’t know how to do that well.

We know that around a sixth of the under-65 population is uninsured, and we need to address that issue. We know how to address it. It’s just a matter of spending money to get them some kind of insurance and I expect that in the next several years we will be addressing that in some fashion.

And the third topic that gets less attention from the public but quite a bit from health policy experts is quality of care and how to get more value from the money we spend. We spend way more than any other country on healthcare per person. The rather crude indicators of mortality that we have suggest that we really don’t do any better on those than other countries. Mortality itself is not a very good indicator of value, but there is no strong reason to think that we do much better on quality of life either. So we have a significant challenge ahead in trying to get more value from the large amount of money we spend on healthcare.

Interviewed by Molly Lanzarotta on October 20, 2008.