The multiyear effort to reform the U.S. health care system finds itself today in a puzzled swoon. We are stuck between the ever more obvious debilities of the Affordable Care Act—deranged insurance markets, rapidly escalating costs from induced industry over-consolidation and other causes, worse-paid doctors and poorer care overall, and more besides—as well as the pathetic inability of the Republican-dominated Congress, together with a Republican White House, to do anything about it.
Worse in a way, both the ACA and the efforts to fix or repeal it are not really about health care reform at all. They are a mere sideshow almost entirely about the question of paying for health care—about the insurance system—which is not even close to the same thing. Just as having car insurance doesn’t make anyone a better driver or navigator, having health insurance says nothing about the quality of health care that the insured person is liable to receive. Our political class, which to all appearances has failed even to identity let alone deal with the causes of cost inflation in health care, has managed to delude both itself and anyone who pays too much attention to it into missing this simple but critical point.
There is no reason for a medical doctor to belabor again in TAI what’s right and mostly wrong with the ACA—Scott Atlas does some of that here, and Robert Pearl did it definitively several months ago. And there is no point either in replaying the details of the abject failure of the Republican majority in Congress to act on the issue. That exercise would only show that the Republicans are no more capable of devising a policy now than they were when Barack Obama was the one holding the veto pen. The only thing that has changed besides their capture of both the Legislative and Executive branches is that many Republicans are again wary of the President, albeit for entirely different reasons.
Some observers think that, given the present impasse, Congress now has no choice but to work out a bipartisan fix for the worst of the immediate problems we face, even in the absence of significant reform—and that, its current rhetoric of brinksmanship notwithstanding, the White House will have no choice but to approve whatever Congress comes up with. I’m no expert in American politics—just an ophthalmologist—but allow me to voice some skepticism about that scenario. Both parties have used the health care issue to engage in what Ronald W. Dworkin justifiably called political shenanigans—essentially offloading the liabilities and risks inherent in our present dilemma onto their own core constituencies as well as others. That is what the party leaderships have been doing for more than a decade; it is not clear that they know how to stop, let alone how to do anything else. And allow me to repeat that, in any case, no imaginable fix coming out of this Congress will actually address the essence of the challenges we face.
Let us instead look beyond legislative possibilities. What is likely to happen in the real world to the existing American health care system in the absence of significant legislative action? Things will not just stay the same; the ACA and other factors have set an array of trends in motion, most of them negative. And what, in the fullness of time, should happen?
Lost in the funhouse of legislative flailing over health care is the fact that by law the U.S. Secretary of Health and Human Services—former Representative Tom Price, sworn in this past February despite fierce resistance from Senate Democrats—has a good deal of discretionary authority. Ironically, perhaps, the ACA assigns more than 1,200 discretionary powers to the Secretary, far more than before. We have some idea what Secretary Price will do with those powers.
A former orthopedic surgeon, Secretary Price has long taken an interest in the problems of the ACA and of the health care sector in general. In his Empowering Patients First Act of 2015, for example, then-Congressman Price proposed: more reliance on the market by increasing Health Savings Account (HSA) allowances; a tax credit for purchasing private insurance; and state-administered pools for high-risk patients who can’t find affordable insurance elsewhere. The idea here, supported by several independent analysts, is to essentially make government financially responsible for the small percentage of sick people who use a wildly disproportionate percentage of available health care resources so that the private insurance market can again become solvent—that being, in his view, the most efficient way to deal with the insurance aspect of the problem. His bill also would have protected those with pre-existing conditions from being dumped by their insurers.
So what will Secretary Price do now that he has become, by default, the main change agent in the health care picture? He can’t repeal any of the ACA’s major clauses, so he cannot by fiat eliminate its unwise personal mandate, taxes, and cost-shifting expansions. But he can be less enthusiastic about enforcing the individual mandate to purchase insurance. He can allow insurance companies to provide less rich coverage of the ACA’s mandated ten essential health benefits. He can resist subsidizing insurance providers for low-income citizens from general revenue funds. (Subsidies currently being delivered are the subject of a lawsuit brought by congressional Republicans, who claim that President Obama unlawfully appropriated general revenue funds without congressional approval.) President Trump is likely to unilaterally exercise his authority to drop the subsidy, since it will save $430 billion over the next ten years. That alone will hasten the demise of the ACA under the hallowed precept that “the worse it gets the better it gets.”
There is more Secretary Price can do. Trump and House Speaker Paul Ryan had proposed a three-stage revision of the ACA. Two of the major provisions were reform of medical liability on a national basis and opening up insurance company policy sales across state lines in order to stimulate more competition and hence get lower premiums. A third seemed about to flow from Trump’s expressed shock at the high prices of pharmaceuticals, suggesting Administration support for government negotiation of prices. Price cannot snap his fingers and make these things happen, but he can feed the Republican majority in Congress some insights and some data to help them craft legislation to make them happen even in the absence of any explicit ACA repeal.
Of course, very influential lobbies are pitted against all three of these proposals. Nevertheless, given the long lead times required to get anything significant done in the U.S. Federal legislative system, it would not hurt to do some serious thinking about these kinds of reforms now in preparation for the day the situation becomes more pliable. And it has to become more pliable, for the U.S. health care system is speeding toward crisis. As the engineering-inspired aphorism has it, something has got to give.
Ultimately, we will have no choice but to face the real issues in health care reform. On the bright side, some dramatic scientific-technical breakthroughs in diagnostics and treatments are coming, and so are a variety of care delivery innovations, some enabled by new communications technologies and others by better managerial and business-model designs. But to take advantage of the former and to enable some of the latter to scale up quickly, we have to get a better grip on costs.
Health care has exhibited a strong tendency toward cost disease in recent decades. This is not the place to analyze all the factors involved, but the resultant dilemma is clear. Aaron Carroll, a professor of pediatrics at Indiana University Medical School, has cited the “iron triangle” of health care, meaning that health care provision involves a balancing act between cost, quality, and availability. We can improve one or two sides of the triangle, but only at the expense of one or two of the others. As things stand now, health care quality in the United States is very high at its best. Availability is not universal, even with the ACA, but the supply of health care is more than adequate. Cost is the distinguishing problem we face, and it is a very big problem.
In 2015 U.S. annual health care expenditure stood at $3.2 trillion, representing 17.1 percent of GNP. While most of the factors behind rising health care costs are common to advanced societies, the United States is an outlier when it comes to the cost side of the iron triangle. Compared to our 17.1 percent, the health care sector represents 10-11 percent of GNP for most first-world countries, only about 8.8 percent in Britain.
The health care systems in other first-world countries are varied, but all achieve their cost containment results by being more socialized than the United States. The result in nearly every case is a two-tiered medical system: basic care for the great majority, and a private quality-medical sector for those who can afford it when they need it. This condition is the very rough equivalent of dividing the insurance pool into separate parts, though not in the same way that Congressman Price’s bill would have done: Government-controlled systems in two-tiered health care environments avoid paying for a lot of expensive care that takes place on the private side of the divide, aiding the struggle for solvency. But the question still becomes, how much and in what ways do the other two parts—quality and availability—of the iron triangle suffer from the cost-containment strategies of socialized medical systems?
Again, there is no need to repeat here what others have made manifest. The basic data you need to answer this question can be found in Scott Atlas’s essay. The gist is that the quality of care is demonstrably worse in the public sectors of socialized systems, and the availability and timeliness of care is usually much worse. This means that if we want to preserve the quality and availability of health care in the United States, we have to get at the cost problem in ways other than by increasing the role of government—state as well as Federal.
How can we do that? The place to begin is to establish the facts as they exist and as they will doubtlessly trend in the absence of any major changes in the law beyond what Secretary Price can do with the stroke of a pen. But it is no simple matter to track where U.S. health care sector money goes. Donald Trump may be surprised to find out how complicated all this is, but no one else should be.
Health care economists typically divide the sector into five subsectors: physicians and other health care providers; hospitals; insurance companies; pharmaceutical companies; and long-term care providers such as nursing homes, to include expenses on durable goods like wheelchairs. In 2015 the hospital share was 32 percent, physicians and other clinical providers 20 percent, pharmaceuticals 10 percent, net cost of insurance 7 percent, and home health care and nursing homes about 8 percent. Other expenditures included investment (5 percent), government administration and services (4 percent), and other health care comprised of research, personal care, dental services, medical products and equipment, and public health activities (14.8 percent). Physicians experienced an 11.5 percent fall in profit margins from 2014 to 2015, while nursing homes had a 2 percent profit margin decrease. Health plans and hospitals did better, with a 3-4 percent profit margin increase. Drug companies experienced a 21.6 percent surge in profit margins.
These trends are affected by asymmetrical regulation. Physicians, hospitals, nursing homes, and durables providers are price-regulated by the government, which is more likely to result in lower rather than higher prices. Insurance companies must get rate increase approvals from state governments, but they are usually approved due to the insurance companies’ market power. The government by law cannot set prices or negotiate prices with pharmaceutical companies, so that helps explain some of the data cited just above. But whichever side is right about the propriety of pharmaceutical companies hauling in such large profit increases, government-negotiated drug prices would, at a maximum, cut national health care expenditures by 5 percent, or roughly $150 billion per year. Since hospitals are responsible for a third of all medical expenditures, more significant savings might be available here. However, most for-profit hospitals run on a small margin, and anyway 62 percent of hospitals are non-profit, while 20 percent are government run. Perhaps the small size of the private sector here is part of the problem: If 82 percent of hospitals are non-profit, what incentive do they have to increase efficiency, decrease cost, and increase productivity?
They and for-profit hospitals are also fenced in by layers of regulations that have only growth thicker over the years. Public and government unions have also been able to entrench themselves, draining valuable resources while retarding innovation and productivity enhancements. Some of these unions have become corrupted, a phenomenon most easily seen in the problems with the Veterans Affairs system. Price controls for Medicare and Medicaid are also a problem for hospitals.
In some cases, hospitals have enough oligopolistic power to negotiate favorable Medicaid rates with state governments. Those that do not have incentive to merge or to form alliances in order to enable them to negotiate favorable rates not just with Medicaid but also with the largest insurance companies—which are themselves oligopolies or effectively monopolies in some regions. Since 82 percent of the hospital market charges high rates in part to cover various inefficiencies, private hospitals have little incentive to compete with them on price. They charge the same high prices as the less efficient non-profits and, if necessary, compete for market share through advertising and other marketing techniques. Any net income from efficiencies left over after local taxes (which non-profits and government-run hospitals don’t pay) goes to shareholders.
Hospital oligopolies, and the high prices they command, are further reinforced by local and state laws requiring any proposed competing hospital to obtain “a certificate of need.” Although the certificate of need is granted by a government agency, existing hospitals essentially must agree to allow the creation of a new competitor. Naturally, they do not always agree, further limiting competition. Furthermore, physicians are often specifically prohibited from starting competing hospitals. So as far as cost disease goes, the hospital sector is a real mess, but more regulations, more government ownership, and more price controls are not likely to improve the situation, as these are already major parts of the problem.
Physicians and other health care providers are the next-largest sector. Physicians took an 11.5 percent pay cut in 2015 compared to 2014. Some readers may be less than sympathetic because they perceive physician salaries to be too high. Suffice it to say, this is not how doctors see the world.
Consider that, for example, Medicare policy has methodically reduced physician pay, “frog-in-boiling-pot” style, for the past decade and a half. About eight years ago a prominent economist on Medicare Payment Advisory Commission, the board that advises the Centers for Medicare and Medicaid Services (CMS) on Medicare rates, told me that they regularly reduced reimbursement by 4 percent each year to take advantage of increased physician productivity. Physician productivity was at that time rising at 6 percent per year; instead of rewarding increased physician productivity they were punishing it. They could get away with this because 6 percent is two points higher than 4 percent, so physicians would still see an increase.
At that time, too, a physician advisory panel often had significant influence in how the pie was divided up among various medical specialties. But in 2015 the bureaucrats at CMS had to make much steeper cuts in order to defund Medicare by $575 billion dollars, largely in order to shift those dollars into Medicaid. So they disbanded the advisory panel and made much steeper cuts to reimbursements in many surgical specialties.
The net effect of this is that large numbers of physicians have been driven out of private practice by low reimbursement. Some who could afford it simply retired. Most others have become employees of hospitals, universities, and other institutions where they lose autonomous decision-making power. Some are also forming or joining groups that can charge higher fees and have more leverage with insurance companies. Lower reimbursement levels forces physicians to become more rushed since they must see more patients per hour to make the same amount of revenue. Add to that the data-clerk demands of electronic medical records and the experience of being a physician not only becomes more impersonal, it also often leaves patients with poorer care and too many unanswered questions.
Meanwhile, a doctor could get the impression that, for any practical purpose, the public health experts advising CMS want to stop rewarding doctors so much for taking care of sick patients and reward them more for documenting that they have tried to keep the patient healthy. If newer physicians get reimbursed as much or more for just recording the fact that they told someone not to smoke or to lose weight than they do for trying to heal and comfort the ill, why focus on healing and comforting? Preventive care is a fine idea, and it can save lots of money, but people will still get sick and need doctors to care for them. So it seems foolish to skew the incentive structure too far away from traditional norms.
All in all, being a physician has become a less rewarding profession in recent years, and financial reimbursement is perhaps the least of the reasons. Price controls and weak market power compared to hospitals and insurance companies have turned most physicians into mere pawns. It is not clear that doing this to the people most knowledgeable about how to deal with illness is a good idea in the long run.
Speaking of insurance companies, they collect and pay out huge sums of money but net only 7 percent of the health care sector—roughly $210 billion per year. Of course, insurance companies are notorious and newsworthy for handing out huge payouts and stock options to executives, so the popular perception differs rather significantly from the reality. Many people think that as long as the American medical system is immersed in profit motives on the part of various actors, prices will always be skyrocketing because greed is part and parcel of human nature. This view is a guaranteed applause line in some circles, but that doesn’t make it true. Consider that the American medical system has always been immersed in for-profit environments, but skyrocketing prices are a relatively recent phenomenon. If the profit motive is really the guts of the cost problem, how to explain this? Don’t strain yourself: You can’t.
In stable markets insurance companies are just like casinos: the law of averages always works out well for them. The ACA, however, has sharply destabilized the market environment by mandating new forms of politically induced risk. The companies must confine themselves to no more than 20 percent administrative fees. They have to refund any excess over 20 percent or, for large markets, 15 percent. They must cover unlimited medical expenses for all patients. They must insure medically catastrophic patients even if they paid no previous insurance premiums. They must cover the ten essential (and expensive) benefits for every insured. The varieties of insurance they can offer is by fiat standardized to only three levels and can be adjusted for individual risk only slightly.
Not surprisingly, the companies had a hard time breaking even on this silly scheme despite raising premiums, instituting larger deductibles, and increasing copays where legally possible. Insurance companies have very predictably lost interest in the ACA for the most part, which has only magnified the oligopolistic nature of their industry. That has left the larger companies to try to exert their oligopolistic—and sometimes monopolistic—powers. The “big boys” have been able to get away with this to some extent because the companies are regulated by state insurance commissions and need not face out-of-state competition.
The McCarran-Ferguson Act, which exempts the insurers from U.S. anti-trust laws, helps too. In other words local insurers can sit together and decide what they will pay for physician and hospital services. Hospitals and physicians can’t do this. A local group of surgeons that tried to get together to negotiate with the insurance companies stimulated the insurance companies to call the Department of Justice anti-trust division, which scared the presumptiveness right out of those surgeons. So the reason insurance companies are raising premiums left and right is not the profit-motive, but the wildly distorted and now thoroughly destabilized market they have to navigate in order to survive.
Finally in our list of niches, nursing homes, and home health care don’t sound like very promising areas for cost reduction. Their profit margins fell 2 percent from 2014 to 2015, and there is little evidence of industry concentration, meaning there is a lot of competition even in such a relatively small sector. More likely, things will get much worse with regard to cost disease in this sector, for two reasons: Large numbers of Boomers are retiring with inadequate savings, and the homecare industry, where wages are relatively low, is at risk of being unionized. No big savings in view there.
So where does this survey lead us? It tells us that, if we value the quality and access to health care most Americans have, we can get a grip on the cost disease problem only by making real changes in the structure and market environment of all five key sectors of the health care industry. As things stand, Congress and the electorate are polarized on two opposing remedies. Democrats and “progressives” favor single-payer insurance, “Medicare-for-all”, and what some call “Canadian Medicine.” Republicans and conservatives favor introducing more competition, limiting some benefits, and delegating insofar as possible the administration of medical allocation decisions to the states and individual consumers.
At the heart of this difference, probably, is an ethical disagreement: To what extent is health care a universal human right, and to what extent is it a service one may choose to buy according to one’s means, like going to a hair stylist. I would guess that far more people take the former position today than was the case even a decade or two ago, but that just raises another question: Just how much health care, as with just how much education, does that entail? You can get wide agreement that there should be some basic minimum level of care that all citizens receive, but defining what that basic minimum is remains elusive on account of an even deeper philosophical disagreement. Democrats and progressives would set that minimum very high, on the grounds that accidents of birth and luck determine a person’s life station. Republicans and conservatives would set that minimum lower, on at least the implicit grounds that merit and character still matter in determining a person’s station in life.
Philosophy aside (since we will never arrive at a meeting of minds on that level), a more practical consideration should weigh on a judgment about these competing remedies: More Federal government control over the various intersecting markets for medical care will result in more bureaucracy, and with it more regulation, subsidies, higher costs, and corruption. It will also stifle trial-and-error, experimental reform efforts at industry and state government levels. Worse, as already noted, the usual result of greater government control in other countries has been a reduction in some combination of quality and availability in an attempt to control costs.
We can already detect this process in the United States, because we are already at least half way to having a form of socialized medicine—an in-between place that is the worst of all worlds from a cost-control perspective. Government programs pay for about two-thirds of all health insurance. Medicare, Medicaid, and veterans’ health care account for about 48 percent, and government workers’ insurance programs—not least Tristar for the military—and a range of other subsidies push the total to about 66 percent or higher (these are not and cannot ever be scientifically precise calculations).
Moreover, amidst this two-thirds, and with heavy implications for rest, government sets reimbursement prices for physicians, hospitals, nursing care, and various medical equipment and supplies. The reimbursement levels do not distinguish quality of service among different providers, because they cannot. After more than a decade of price controls actual reimbursements for various services now bear little if any relationship to actual patient demand. The Federal government also sets treatment guidelines in Washington despite considerable regional variations in perceived need and the availability of services offered.
It has also imposed mandatory electronic medical recordkeeping. Despite meager financial reimbursement for early implementation, each practitioner in my office lost roughly $330,000 according to net present value calculation the day they signed the contract for the computer program. This is a regulatory mandate in the sense that a practitioner could lose up to 9 percent of government reimbursement for not having the required computer system. There are thousands of regulations at all levels of government requiring expensive and time-consuming compliance, coupled with heavy financial, civil, and criminal penalties.
As a result of all this, we by no means have anything approaching either a free or lightly regulated market in health care. Not that markets can solve all problems, but there simply cannot be a rational allocation of health services or any incentive to reduce costs consistent with rational allocation under a system that suffocates markets as much as the present system does.
What to Do?
It takes a book, at least, to spell out in detail the range of things we can do to heal the sickness in our health care markets. So let me just briefly telegraph some of my personal favorite incremental changes to lower costs, increase availability, and improve the quality of U.S. medical care.
First, for insurance, let individuals rather than companies get the tax breaks Congress serves up; let all insurers compete in every state; and provide low- or no-income patients with Medicaid HMO-style care, with increasing choice as their income and insurance payments increase.
Second, for hospitals, let anyone build a hospital as long as it passes inspection; government, “non-profit,” and for-profit hospitals should pay the same taxes and have access to the same bond facilities.
Third, for pharmaceutical companies, change the law so that the government can negotiate prices for those domains of medical care it takes responsibility for; make it legal for citizens to purchase medications from abroad; and allow foreign companies to get FDA certification as to the purity of their medications in order to protect the consumer against counterfeits, impure medicines, and deceptive claims.
Fourth, for physicians, make medical liability no-fault, with retraining or license restriction for offenders; make compliance with complex regulations no-fault, with retraining or restriction if compliance becomes a serious problem; and allow physicians to decide in advance for which kinds of patients they want to accept for Medicare, rather than the all-in-or-out requirement now.
Can we really do any of these things in the face of opposition by major lobbies? It isn’t easy. Various corporations and interest groups spent $3.15 billion for lobbying at the Federal level in 2016, and the health-related sector ranked first of all lobbying sectors with expenditures of more than $151 million. Yet there is hope. Over time the cumulative effect of blatant rent-seeking behavior in a democracy can cause voters to rise up, as we now see with the pharmaceutical industry. Congressmen are investigating excessive price increases in generic and off-patent medicine, such as with the EpiPen scandal, and the State of Maryland recently passed a law barring “unconscionable” increases in the price of generic drugs. The kind of democracy-induced pressure hasn’t reached the insurance sector yet, but if enough of the electorate experiences the limited or complete lack of availability of ACA insurance carriers, it will—and then Congress will be able to act more decisively against the droning of the lobbyists.
I am persuaded that if we can move back toward a more free-market orientation, costs would go down. Patients with choices who are spending more of their own money would admittedly be faced with making difficult decisions as to what health care services were worth to them, but it is not beyond the ability of medical professionals to counsel such people effectively. Competition would allow the supply and demand curves to more rationally, if still imperfectly, determine prices.
For patients who lack enough money to buy, or simply refuse to buy, health insurance, a non-choice government-conceived and operated system will still be required to provide a minimum of care. But since such patients aren’t spending any of their own money, they can’t participate in market decisions and have forfeited any ability to make choices. Medicaid already serves this function, even if—as every serious analysis of Medicaid outcomes shows—it isn’t very effective.
The choices are ours, and we will make them because eventually we will have to. Whether the ACA will be repealed or not has always been a mere side issue of a much larger set of problems. Repealed or not, the ACA cannot remain unaltered because the reality to which it has contributed is not sustainable—not mainly because of what the ACA addressed, but because of what it left unaddressed.