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Our Affordability Problem
Researchers and policy-makers argue about the quality of the U.S. health care system relative to other developed countries, but there is no debate about its relative cost: U.S. health care is the most expensive in the world. We spend significantly more of our national income on health care than any other country, and this has been going on for a long time. Federal tax policies have subsidized health care since World War II. Direct government funding of health care, which began with the passage of Medicare in 1965, added government money, which has now expanded to finance almost half of total health care costs. The U.S. has been the largest sponsor of biomedical research in the world for decades. For these reasons and many others, U.S. health care costs have continued to grow faster than GDP over five decades, except for brief periods at the end of some recessions.
Part of the cost difference between the U.S. and other developed countries is due to these countries’ commitment to providing universal health care for all their citizens, a 19th century idea developed by Otto von Bismarck and popular with Democratic politicians in this country for more than a century [see “Medicare for all”]. Because universal health care requires government funding, health care expenditures in these countries are constrained by their ability to raise tax revenues and/or enact mandates that require employers or individuals to purchase health insurance. Implementing universal health care requires national negotiations between monopsonist governments and insurers, providers, and suppliers like pharmaceutical companies, in the context of constrained government resources. In other words, in contrast to the U.S.’s subsidization of health care, these countries have imposed sector-wide price controls to contain government-funded health care expenditures.
The effects of these price controls have been predictable:
- Reduced factor prices (physician and nursing salaries, drug and device costs, etc.), as Uwe Reinhardt and colleagues pointed out in their famous 2003 Health Affairs article, “It’s the Prices, Stupid.”
- High capacity utilization and queues (especially severe in Canada and the U.K.)
- Under-investment in technology
- Public dissatisfaction and pressure to escape the public system by 10-20% of the population who can afford it
In addition, for globally traded goods like drugs and medical devices, price differences between the U.S. and other developed countries have indirect effects on the balance of trade. In the U.S., pharmaceutical and device manufacturers negotiate prices with individual insurers and providers (and a few states, on behalf of their Medicaid beneficiaries). In other developed countries, however, these companies must negotiate with government buyers or regulators that control larger volumes and have much greater pricing leverage. The net effect is that U.S. consumers and taxpayers pay higher prices for pharmaceuticals, thereby funding drug development for the world. Other countries are free riders, getting the benefit of advanced drug development at a fraction of the cost.
What Can We Do?
We can’t ignore our affordability problem any longer. Taxpayer-funded government health programs are busting the federal budget, and the retiring baby boom generation will exacerbate this problem. Medicare and Medicaid reimbursement to doctors and hospitals is flat or declining, and as a result doctors are checking out and queues are growing for government-funded patients. Political pressure is building to expand government-funded programs (e.g., “Medicare for all”), which will put more Americans at risk. We are headed for a two-tier system, where government-sponsored patients, even if they have insurance, will have fewer choices and less access than today. One way or another, our cost problem must be addressed in the next 5-10 years.
IAHC’s point of view is different from most other groups focused on controlling national health expenditures. The high cost of health care is a structural problem that has built up over time. While others may propose government “magic bullets” like accountable care organizations or single payer healthcare, we do not believe any government restructuring program will solve this problem. Government programs can do only three things to reduce costs: (1) ration care, either directly or indirectly; (2) force standardization, which can sometimes produce economies of scale but can easily go astray; and (3) minimize perverse incentives. To date, U.S. consumers / voters have found #1 unacceptable, and federal and state governments have consistently proven unable to do either #2 or #3.
Instead of reducing costs, history shows that government health care programs have been major contributors to the cost problem. As Medicare and Medicaid have grown, healthcare providers have simply raised costs for private payers. Private payers have, in turn, increased co-pays and deductibles, forcing insured people to pay more. And, while Medicare and Medicaid are working constantly to cut costs, given political pressures, they have had limited success. For people greater than 65 years old, U.S. governments spend more than twice as much as governments of other countries do for their seniors. The end result is a massive transfer of wealth from working people to Medicare and Medicaid beneficiaries, but with minimal impact on costs.
The private sector, on the other hand, is full of health insurers, health systems, providers, suppliers, and innovative entrepreneurs developing new drugs, devices, delivery systems, data networks, care management tools, etc. The only effective way to “unwind” excess costs over the long run is to stimulate price competition to develop cost-saving innovations. Historically, consumers have been insulated from healthcare costs by employer-sponsored health insurance, and employers have been insulated by government tax subsidies, which makes $1 of health benefits less costly than $1 of salary. This has led health care innovators to focus more on improving quality than on reducing cost because that’s where the revenue is. But that is not the case in other industries where price competition exists – e.g., airlines, autos, telecommunications, oil and gas. In these industries, process innovation has reduced cost dramatically. The good news is that both these layers of insulation are breaking down, and consumers and employer-buyers are beginning to make tradeoffs between cost and quality. As long as government protects markets and encourages price competition, cost savings will naturally occur.
IAHC.com is a collaborative web site aimed at identifying and promoting “cost-unwinding” innovations in ten different categories:
- Redesigned clinical processes that enable more cost-effective care delivery
- Cost-saving technologies and process innovation that improve efficiency
- Organizational changes that help health care companies get closer to their customers
- Strategic changes that reallocate capital and reposition assets to meet market needs
- Changes in the health care work force that improve performance and efficiency
- Stronger financial systems that improve cost measurement and management
- World-class business processes that help smaller players realize economies of scale
- Customer engagement tools that help consumers and employer-buyers manage costs
- Realigned incentives that motivate consumers and employer-buyers to reduce costs
- Governmental initiatives to stimulate price competition
Readers may contribute comments to the general blog or any of these categories. The categories themselves are not “cast in stone” and will evolve over time. Contributions should be as specific as possible, providing tangible evidence of actual or potential impact on cost, wherever possible. Diatribes without data will generally be screened out…unless they are highly entertaining.
Fellow Travelers
A number of other organizations are aimed at goals similar to IAHC’s, including the Health Care Cost Institute (healthcostinstitute.org), the Council for Affordable Health Insurance (cahi.org), the Institute for Clinical & Economic Review (icer-review.org), the Bi-Partisan Policy Center (bipartisanpolicy.org), Stanford University’s Clinical Excellence Research Center (cerc.stanford.edu), the Health Care Systems Research Network (hcsrn.org), and others. We hope to collaborate with many of these organizations as we pursue our common vision.