Most Americans believe that we
should have a healthcare system that provides care to all of us. We do not have
such a system, and one of the reasons we do not is that our healthcare is too
expensive. Healthcare in the United States costs far more than healthcare in
other developed countries but does not deliver better results. Books have been
written to answer the question of why our system is so expensive, and in this article,
I have tried to summarize their findings in a useful way.
There are five fundamental reasons
why our healthcare has become so expensive, and they are:
1. The
enormous advances in medicine that have taken place since World War II have pushed
up the price of healthcare.
2. Our
third-party payment systems were introduced and later modified without planning
or effective cost controls. They pay “fee for service” for healthcare in a
fragmented and uncoordinated market.
3. Healthcare
organizations and medical practices have come to be governed by a business
ideology that gives priority to maximizing revenue and market share over all
other goals.
4. Our
system does not contain incentives for patients to make good use of primary
care or to adopt health lifestyles. Health care providers are paid for treating
sick people rather than for keeping them healthy.
5. Our
government has intervened in the healthcare market in ways that were badly
thought-out and distorted by politics.
Advances in Medicine
Healthcare is expensive in all countries
because modern drugs and medical procedures are expensive. Improvements in
pharmaceuticals, in anesthesia, in diagnostic techniques and in surgery that
have been made since WWII have made it possible to cure diseases that we could
not cure before that time, but those advances have come at a cost. We must recognize that if we want to have the
medical science of the twenty-first century, we will have to pay more for healthcare
than we did in 1940.
However, not all of the cost of healthcare
in the United States may be accounted for by the advances in medical science.
The process of innovation in medicine has interacted with the other four causes
to inflate our healthcare costs far beyond those faced by other countries.
The Emergence of Third
Party Payment without Planning or Cost Controls
Employers began to offer health
insurance during World War II because wartime wage controls prevented companies
from offering higher wages to attract employees in the tight wartime labor
market. After the war, health insurance
gradually became a standard part of the benefits that large companies offered
to their employees, and most Americans now expect that most of their medical
bills will be paid by health insurance that they obtain through their jobs.
Furthermore, this became a tax-exempt form of income with the tax reform act of
1954.
Health insurance or any system of
third-party payment changes fundamentally the nature of competition in the healthcare
market. If I am sick and have good
health insurance, I do not care how much it costs to cure me. I want the best
care delivered in the most agreeable way, and therefore, a hospital seeking my
business focuses on providing all of the latest technology and on making its
patients as comfortable as possible. So, we have a private room for every
patient, and we have too many MRI machines or CAT scan machines in each
community. These investments have to be paid for, and because the hospital’s bills
are paid by insurance companies rather than by the patients, the hospitals in
many communities can simply raise their prices.
The ability of hospitals to raise prices has also been enhanced by the
emergence of large hospital and clinic chains that dominate local healthcare
markets.
Third-party payment creates similar
incentives for pharmaceutical companies. They concentrate their research on
drugs that will bring high profits, and they raise prices to inflate those
profits. The patients of course want the latest and greatest drugs to cure
their illnesses, and they do not care about cost when they do not have to pay.
The effect of third-party payment
is magnified for doctors by the “fee for service” payment model. When doctors are paid a fee for each service
that they provide, they can increase their incomes by providing more and more services,
even when the services do not help the patients, and if the patients do not care
how much they are charged, the opportunity to bill for unneeded services is
greatly enhanced. So, we find doctors performing unnecessary tests and
unnecessary surgeries.
In addition, the doctors find ever
more creative ways to bill for their services in order to maximize their
incomes. For example, they use “physician extenders” like nurse practitioners
or physician’s assistants, and the patient is billed both for the time of the
extender and for that of the physician who “supervises” her.
The insurance companies resist
these trends, but their resistance is weak and uncoordinated. Because of
anti-trust law, they do not band together to negotiate with the hospitals. Instead,
each insurance company negotiates as it can, but the companies individually are
often not strong enough to hold down prices. To save money in this situation, the
insurance companies have adopted several strategies. First, they employ people
to scrutinize each claim in order to deny any claims that they can deny.
Second, they raise the price of the insurance they sell. Finally, they sell policies with high deductibles
and co-pays to encourage patients to choose the most cost-effective treatments.
As prices of both healthcare and
health insurance keep rising, patients are less and less able to afford their
insurance and more and more people are uninsured. Those who are insured find
that as deductibles and co-pays rise, the insurance covers an ever smaller
share of their medical bills.
The distorting effect of
third-party payment is magnified by the fact that often neither doctors nor
patients know the prices of drugs or medical services, and information about
prices is very hard to obtain for several reasons. First, each insurance
company negotiates separately with each health care provider. So, the price
depends on the patient’s insurance. Second,
healthcare providers are very reluctant to tell either patients or doctors what
the prices of specific services are. Third,
doctors are not trained to think about prices when they prescribe treatments.
Thus, even in cases where a patient or a doctor might choose an inexpensive but
effective treatment over a more expensive one, he or she lacks the information
to make that decision.
The Rise of the Ideology
of Maximizing Revenue and Market Share
American health care providers have
come to accept a variation of an idea famously expressed by the economist
Milton Friedman in an article in The New
York Times Magazine, where he said,
… there is one
and only one social responsibility of business—to use its resources and engage
in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free competition
without deception or fraud.
Most health care providers are at
least nominally non-profit organizations. So, they don’t strive to maximize
profit, but they do strive to maximize revenue and market share. This approach is
in direct conflict with the traditional ideology of medicine, which stresses
the physician’s duty to care for patients and with the traditional mission of
hospitals, which were charitable institutions designed to provide beds and
nursing care to patients.
The idea that the main responsibility of a health care provider is to
maximize its revenue and market share has become widely accepted as we can see
by the fact that the CEO’s of such organizations are rewarded mainly for advancing
those goals, although measures of the quality of care are also considered in some
healthcare organizations. Since the health care providers are non-profit
organizations, their administrators use the revenue to raise their salaries and
to build luxurious facilities.
Many doctors are bothered by the
idea that maximizing their incomes is their only responsibility, but they have
little choice but to go along. If they join a large healthcare organization,
they are pressured to maximize the money they bring into it. If they stay
outside of large organizations, the doctors in many markets find that their
costs go up and their incomes go down because they are “outside of the
networks” within which patients covered by insurance must often seek their care
The idea that the only goal is to
maximize revenue and market share magnifies the effects of third-party payments.
The idea justifies the use of any charges that are not actually fraudulent or
illegal, and it justifies raising prices to levels that cannot be justified by
the need to cover costs. A recent case that illustrates the problem concerns
the AIDS drug Daraprim. The rights to Daraprim were purchased by Turing
Pharmaceuticals, which had been founded by a hedge fund manager named Martin
Shkreli. After purchasing the rights to the drug, the company raised the price
of a dose from $13.50 to $750.00, and if a company’s only responsibility is to
maximize its revenues, it was fully justified in doing so. This is a
particularly egregious example, but it is not atypical. In her book, An American Sickness, Dr. Rosenthal tells
us about the many strategies used by doctors and hospitals to maximize their
incomes.
They invent charges in order to inflate
their bills. For example, a hospital may charge a “facility fee” for the use of
an operating room in addition to the charges for all of the materials that are
used in an operation. This is as if an automobile dealer were to add a facility
fee to the price of a new car in order to cover the use of his showroom.
Doctors have been quick to follow suit. A surgeon may establish an ambulatory
surgery center where she, too, may charge a facility fee.
Insufficient
Incentives to Use Primary Care or to Choose Healthy Lifestyles
Our healthcare system does not do
enough to encourage people to use primary care. Good primary care is very
inexpensive. It can help people to avoid getting sick, and it can catch
illnesses before they require hospitalization. Often, health insurance does not
cover primary care, and this is especially true for policies with high
deductibles or co-pays. Moreover, this
country has many people who have no health insurance at all, and they can
receive free care mainly in hospital emergency rooms. Consequently, we rely too much on emergency
rooms and hospitalization, which are the most expensive parts of our healthcare
system.
Our system also does too little to
encourage people to live in healthy ways. A large part of the cost of
healthcare in the United States is due to the need to care for people with
chronic conditions like diabetes or obesity.
We can reduce the frequency of such conditions by encouraging people to
live in healthy ways, but our health care providers are incentivized to treat
sick people rather than to keep them well. That, too, raises the cost of
healthcare in our country.
Poorly Thought Out
and Politically Distorted Government Intervention
The increased cost of healthcare
has created hardships for people who cannot afford insurance that really covers
the cost of the care they need. This problem has become so serious that the
inability to pay inflated medical bills has become the principal cause of
personal bankruptcy in the United States. To alleviate the hardships
experienced by our citizens, the federal government has stepped in with programs
designed to pay for care for people who cannot afford it.
The most important of these is
Medicare, which pays for care for old people.
It doesn’t cover the whole cost, but people may buy reasonably priced
Medicare supplement insurance that covers most of the part not covered.
Medicare has been extremely successful in providing care, but it has been much
less successful in controlling the cost of care. In fact, in some ways, it has
contributed to the problem.
Medicare has enough market power to
set the amount that it will pay for any particular service, and any doctor or
hospital that wants to treat Medicare patients must accept what Medicare pays.
So, the program is able to control its own costs to some degree, but Medicare
pays “fee-for-service.” So, the program is still vulnerable to bills that are
inflated by charges for unnecessary services. In addition, it cannot control
what the doctors and hospitals do to recover the income that they lose by
treating Medicare patients. That income
is recovered through inflated charges that are paid by non-Medicare patients. As
we have seen, the healthcare market places few constraints on the ability of healthcare
providers to inflate their prices or to invent new ways to bill for their
services, and the use of such methods drives up the cost of care in the system
as a whole.
Medicare has also been unable to
control the cost of drugs but in this case, the reason is political. When
Medicare Part D, which pays for prescription drugs, was created, the drug
companies lobbied successfully for a provision in the law that prohibited
Medicare from bargaining with them over drug prices. Medicare had to accept
whatever prices the companies set. Some patients may choose a Medicare
Advantage Plan or a private drug coverage plan that is permitted to bargain
with the drug companies, but no such plan has the bargaining power that
Medicare is prohibited from having. Of course, that means that the drug
companies are able inflate their prices at will as we have seen in the case of
Daraprim.
The political resistance to
practical measures to control the cost of care has also affected the Affordable
Care Act otherwise known as Obamacare. President Obama’s proposal originally
included national negotiation of drug prices along with other provisions to
control costs, but most such provisions were stripped from the bill in order to
get it passed with the support of powerful organizations like PhrMA, the AMA
and the American Hospital Association.
Thinking about a
Solution
How can we solve the problem of the
ever increasing cost of healthcare? How can we create a system that provides
care for all of us at a cost we can afford to pay? I will not attempt to offer a detailed
prescription for a solution, but I can suggest some principles that can form
its basis.
First, we must accept the need for
non-market methods to control costs. We cannot provide care for all citizens
without such methods. The cost of modern healthcare would be too high for most
of us to afford without health insurance, and so, we must find ways to counter
the price inflation that third-party payment systems introduce into the
market. Every country with a successful
system of universal healthcare has had to use non-market methods for
controlling costs, and there is no reason to believe that we can be an
exception.
Non-market methods might include dictation
of prices by government in the way that Medicare dictates prices now, or the
methods might include national or perhaps state-level negotiations of common
prices for drugs or for “bundled prices” for medical or surgical treatments. (A
“bundled price” is a single price for – say – removing a gall bladder, and that
single price would replace the detailed list of charges for individual services
that now appear on a bill for gall bladder removal.) National negotiations and
bundled prices are used in several countries.
Effective managed competition could also be part of a solution.
Second, our system must encourage
hospitals and doctors to strive for high quality care rather than for maximum
revenue and market share. Some
incentives of this kind are already included in the Affordable Care Act. For
example, a hospital may be penalized if it has too high a readmission rate.
Third, we need a system that
encourages people to make good use of primary care. Good primary care reduces
the need for emergency care and for hospitalization, which are the most
expensive parts of our healthcare system.
Some encouragement for people to use primary care is already included in
the Affordable Care Act. For example, the act requires that certain kinds of screening
tests – like colonoscopies - be offered free to patients. We might also reduce costs by requiring primary
care physicians to act as gatekeepers to the rest of the healthcare system as
is done today in the United Kingdom.
Fourth, we need a system that
encourages people to live in ways that promote health. Much of the cost of healthcare in the United
States is due to the cost of caring for people with chronic conditions like
diabetes or obesity, and the frequency of such conditions can be reduced by
encouraging people to adopt healthy lifestyles. Ways to do this are not hard to find. For
example, my Medicare supplement insurance pays for membership at a gym on the
theory that regular exercise will make me less likely to need expensive medical
care.
Finally, the system must provide
patients and doctors with accurate information about prices in order to enable
them to make decisions based on costs.
For more specific ideas about how
we can build a better healthcare system, you can look at the books by T. R.
Reid and Elisabeth Rosenthal in the list of sources. Mr. Reid’s book is a
survey of the healthcare systems that are used in several countries around the
world. A briefer version of the survey may be found in a video called “Sick around
the World” that was originally presented in the "Frontline” program on
PBS. You can watch the video on YouTube at https://www.youtube.com/watch?v=NSpnpexPN5k.
Dr. Rosenthal’s book is a
comprehensive review of the way that our current healthcare system has evolved
over the last several decades. The book also contains her detailed
prescriptions for turning it into a system that provides good care at prices
that we can afford.
Sources
1.
T.R. Reid, The
Healing of America, Penguin Books, London, 2009
2.
Elisabeth Rosenthal, An American Sickness, Penguin Press, New York, 2017
3. Milton
Friedman, “The
Social Responsibility of Business is to Increase its Profits” The New York
Times Magazine, September
13, 1970. http://umich.edu/~thecore/doc/Friedman.pdf
4.
Andrew Pollack, “Drug Goes From $13.50 to $750,
Overnight,” New York Times, September
20, 2015, https://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html
5.
[Author not known], “More Americans Say
Government Should Ensure Health Care Coverage,” Pew Research Center, http://www.pewresearch.org/fact-tank/2017/01/13/more-americans-say-government-should-ensure-health-care-coverage/
6.
Melanie Evans, “Bonuses Still Tied to Better
Financials,” Modern Healthcare, April
26, 2014, http://www.modernhealthcare.com/article/20140426/MAGAZINE/304269985
7.
[Author not known], “Medical Bills
Leading Cause of Bankruptcy Harvard Study Finds,” Consumer Affairs, February 2, 2005, https://www.consumeraffairs.com/news04/2005/bankruptcy_study.html
8.
Alain Enthoven, “History
and Principles of Managed Competition,” Health
Affairs, Vol. 12, Issue 1, https://www.gsb.stanford.edu/faculty-research/publications/history-principles-managed-competition
