Featured
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 and has grown to finance almost half of total health care costs, accelerated this trend. 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 to all their citizens, a 19th century idea invented by Otto von Bismarck. 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 requiring employers or individuals to purchase health insurance. Implementing universal health care typically involves high-level 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 effect of these price controls has been predictable: (1) reduced factor prices (physician and nursing salaries, drug and device costs, etc.); (2) high capacity utilization and queues (especially severe in Canada and the U.K.); (3) less investment in technology; and (4) public dissatisfaction and pressure to escape the public system by 10-20% of the population who can afford it. Given the pricing artifices on both sides, there is no way to know what the actual “free market” equilibrium price for doctors or drugs really is.
For globally traded goods, such as pharmaceuticals 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 monopsonist 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, funding drug development for the world. Other developed countries are free riders, getting the benefit of 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 accelerate this problem. Medicare and Medicaid reimbursement is declining, and as a result queues are growing for government-funded patients. 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 will have to 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. We see excess health care costs as a structural problem that has built up over time. While others propose governmental “magic bullets,” we do not believe any government restructuring program will be able to solve this problem. We have seen this movie many times before: Government programs will be ineffective, unacceptable, or coopted by special interests. The only way to unwind our excess costs is to remove government impediments and stimulate competition between private insurers, providers, and suppliers. This will require a groundswell of innovation aimed at:
- Redesigning clinical processes to deliver more cost-effective care
- Investing in cost-saving technologies and process innovations that improve efficiency
- Restructuring health care organizations to provide more customer-driven solutions
- Repositioning clinical assets like inpatient beds to meet market needs more efficiently
- Rebuilding our health care work force to improve performance and efficiency
- Strengthening financial systems to support improved cost measurement and management
- Building world-class business processes to enable smaller players to realize economies of scale
- Engaging consumers in managing their own health care costs
- Realigning incentives to motivate health care institutions to reduce costs
- Shifting government’s role from trying to control quality and cost directly to stimulating competition to achieve these goals
IAHC.com is a collaborative web site aimed at accelerating this unwinding process, and these ten categories are intended to elicit a diverse set of “unwinding” ideas. Readers may contribute comments to the general blog or any of these sections. The sections 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.