TREND WATCH: What’s Happening? U.S. health care spending continues to soar. The GOP’s proposed Obamacare replacement is no silver bullet: Rather, it is just the latest act in a decades-long series of health care “reforms” that are ostensibly designed to control costs but in the long run do nothing to slow the health care spending juggernaut.
Our Take: What will truly cut costs? The left says the answer is total government control; the right says the answer is no government whatsoever. The ultimate plan will lie somewhere in the middle, a combination of policies that will make markets work better and structural changes that will incentivize savings.
Following the administration’s setback yesterday in trying to cram an ACA replacement plan through the House, everyone is trying to figure out whether Trump’s vaunted “momentum” has been slowed or whether his high-risk plan for today--pass a replacement or live with Obamacare--will work. Weirdly, for a plan that promises to turn Medicaid into a block grant and capitate subsidies to low-income Americans, it is the conservative wing of the GOP that is dragging its feet.
Yet lost in all this clenched-teeth drama is what is going to happen to U.S. health care as a whole, which is the only question that most Americans ought to be concerned about. Keep in mind that the ill-fated ACA subsidized exchanges only cover about 8% of all working-age adults. Most of the rest of America will be little affected by repeal-and-replace--including employer-paid plans, Medicare, and military and veterans care. Even if a GOP replacement plan were perfect—which the American Health Care Act (AHCA) is surely not—U.S. health care spending would continue to be driven upward by the rest of our health system.
So instead of poring over how the AHCA impacts our health spending at the margins, let’s take a step back and examine the entirety of the U.S. health care cost problem.
First, let’s measure its dimensions. The sheer magnitude of U.S. health care spending—and its rate of growth—is staggering. The latest data from the Altarum Institute indicate that total annualized health spending topped $3.4 trillion in December, accounting for 18.2% of GDP—both all-time highs.
Worse yet, this figure is poised to soar at an ever-higher rate over the coming years. The Centers for Medicare & Medicaid Services (CMS) projects that health care will hit 20% of GDP by 2025. But these figures use an unrealistically optimistic GDP forecast: Adjusting for factors such as slowing working-age population growth, we predict that the rate of acceleration will be even steeper. How steep? On our current course, we could see health care rise to over 23% of GDP by 2025.
Thanks in part to the ACA, federal and state governments have taken on an ever-greater share of this cost burden: As we’ve mentioned in a previous note (see: “Medicaid for the Middle Class?”), Medicaid has accounted for the greatest share of all coverage gains since the ACA’s rollout. And updated projections show the Medicare trust fund (HI) running dry by 2028, two years earlier than previously estimated. (In fact, CMS and CBO forecasters say that under the new Republican plan, HI could run dry as soon as 2024.)
The government is not the only party for whom health costs are skyrocketing. Americans are spending more out of pocket than ever before, thanks in large part to rising premiums and the growing use of high-deductible plans: Benefits consultancy Mercer found that, in five years, the share of employees in high-deductible plans has more than doubled to 29%. According to BLS data, middle-income household spending on health care jumped by 25% from 2007 to 2014.
One shocking statistic comes courtesy of the Milliman Medical Index, which tracks total health care spending (including all premiums and out-of-pocket spending) for a family enrolled in a typical employer-provided plan. This index shows that in 2016, the typical U.S. family of four consumed nearly $26,000 worth of health care—the highest level ever.
WHY AMERICA SPENDS SO MUCH ON HEALTH CARE
What’s causing this spending explosion?
Population-level effects. Americans consume vastly more health care than our global counterparts. This is because Americans are less healthy than other developed nations, thanks to lifestyle factors such as stress, high-sugar diets, high-risk behaviors (yes, that includes drug abuse), and lack of exercise. A 2013 National Academy of Sciences report determined that the United States ranks far behind other high-income countries in nearly every measure of wellness, whether it’s infant mortality or life expectancy at birth.
While the age-adjusted mortality rate continues to decline in other high-income nations, it has recently plateaued in the United States—and actually rose in 2015. (See: “More Deaths, Fewer Births.”) Over the last fifteen years, significant declines in the life expectancy of non-college middle-age whites are nothing short of alarming.
Worse yet, demographic aging means that these poor health statistics won’t likely turn around anytime soon. Why? Boomers continue to bring their higher rates of chronic disease and poor lifestyle habits into the older age brackets once dominated by the healthy Silent Generation. Boomers are less likely to say they’re in “excellent” health—and are more likely to be obese, diabetic, hypertensive, and physically inactive—than the Silent were at the same age. (See: “Boomer Malaise.”)
If you think that our massive health-related spending must at least be buying us at some significant health benefits, think again. Population health is determined mostly by public health infrastructure and lifestyle habits—not by spending on doctors and hospitals. In other words, don’t look for any reliable link between health care spending and health. For example, despite spending more than twice as much as France on per-capita health care, the United States ranks just #31 in the world on life expectancy, 22 spots below France.
Indeed, U.S. acute health care delivery is actually implicated as a significant cause of higher mortality: Look no further than the high U.S. medical error rate and the U.S. opioid epidemic. In America, we pay doctors so much to “intervene” whenever they can that we are often just paying them to make us sicker.
Industry-level effects. Of course, an unhealthy population is just one reason why health care costs are soaring. Many industries and providers within the health care sector have a great deal of power over the prices they charge. A combination of market concentration, high barriers to entry, regulatory bias, and lack of transparency enables these entities to price-discriminate. That also pushes cost up.
The biggest national showcase is Big Pharma. Whether it’s Valeant Pharmaceuticals jacking up the price of an HIV drug or Mylan hiking EpiPen prices, Big Pharma firms have taken a lot of heat for exploiting their competitive advantage in product lines where no substitutes are currently available. Despite regulatory controls, these companies continue to hold tremendous sway over the medical profession by influencing which drugs physicians recommend, according to a 2016 ProPublica study of doctor prescribing behavior. Compounding the pain for consumers is the fact that drug import bans effectively force U.S. residents to subsidize Big Pharma sales to the rest of the world.
Geographical differences in the price and frequency of any given medical procedure are also troubling, since they point to lack of both transparency and competition in local markets. For example, a knee replacement is almost three times more likely to be prescribed to a Medicare enrollee in Salt Lake City than one in San Francisco—without any evidence that Salt Lake City residents are walking around in less pain than their Bay Area counterparts. (These gross treatment disparities, in everything from hysterectomies to back surgery, are catalogued yearly by the Dartmouth Atlas of Health Care.)
System-level effects. Yet perhaps most responsible for high U.S. health spending is America’s cost-plus “fee-for-service” health care model, which incentivizes patients and providers to bill third parties (government and insurers) for whatever care they agree is needed. In this system, doctors are paid based on volume of services or patients treated with little to no regard for long-term wellness or total cost—which maximizes utilization. Additionally, as we’ve mentioned elsewhere (see: “Goodbye, Dr. Welby”), this is causing physician burnout at a time when the medical system can ill afford a doctor shortage.
Instead of relying on markets, consumer choice, or per-capita provider budgets to constrain spending, U.S. health care cost control hinges entirely on vast numbers of treatment-level regulations that attempt to curb reimbursements. This model not only fails to cut costs—it adds a huge administrative cost burden. Some experts estimate that at least 30% of U.S. health care spending consists of administrative costs, which explains why most of the personnel you see in a doctor’s office handle paper, not patients.
POSSIBLE SOLUTIONS
How can these problems be remedied? Proposed solutions tend to fall along ideological lines. The Bernie Sanders left favors putting the federal government in charge of a universal, “single-payer” health budget. Maybe we could start, they suggest, by gradually expanding Medicare coverage to younger age brackets. The Rand Paul right favors going cold turkey and completely removing the federal government from health care. They even lambaste the GOP-drafted AHCA for allowing refundable tax credits and thereby not going far enough to promote a free market.
While either of these solutions, rigorously implemented, would no doubt succeed in controlling costs, neither would fly with the American public. Most U.S. citizens don’t want government running health care if it means higher taxes or giving up employer coverage (as noted in a 2016 Associated Press/GfK poll), while even fewer believe that government should be completely uninvolved with care provision (according to Pew Research).
Instead, regulators likely will settle on a solution somewhere in the middle. There are two basic intermediary approaches.
The “softer” conservative approach would be to re-regulate markets to allow them to work more efficiently. This might include approaches such as:
- reducing the tax-exclusion subsidy to employer-paid plans;
- cutting back on state-mandated benefits;
- always requiring patient cost-sharing on last dollar spent;
- getting rid of two-tier drug pricing;
- allowing insurers to operate across state lines;
- banning back-door industry subsidies;
- beefing up regional antitrust enforcement;
- promoting direct-pay providers;
- requiring more transparency and less price discrimination from providers;
- capitating means-tested public assistance; and
- tightening means-tested eligibility.
Many provisions of the AHCA work toward these goals—though some, like cutting back on the employer tax exclusion, remain controversial even among Republicans. (Indeed, the GOP is doing even less than Obama did—cravenly delaying the so-called “Cadillac tax” for another five years.)
The “softer” liberal approach would be to reorganize the delivery model in a way that incentivizes providers, rather than patients, to become more cost conscious. One first step toward this goal would be to require more widespread adoption of “bundled” payments for individual procedures. A more ambitious approach would be to move further toward “capitation,” in which providers receive a fixed amount per patient and are forced to provide care within those means (as in an HMO). A competitive capitated plan is incentivized to achieve huge cost efficiencies even while improving quality of care--for example, by paying primary physicians and case managers more and by paying specialists less. Medicare Advantage and the accountable care organizations recently put in place by the ACA are both examples of capitation, though neither have yet realized their savings goals.
SO WHAT’S AHEAD FOR U.S. HEALTH CARE?
As mentioned earlier, population effects are the single biggest driver of overall health. If we do not find a way to address poor U.S. lifestyle habits, we are doomed to spend ever-more health care dollars on a sick population with no noticeable effect of improving health. Thus, the simplest and most effective solution starts with two words that the health care establishment doesn’t want to hear: lifestyle and prevention. Research shows that few physicians bother talking about these things due to lack of “compliance”—meaning, patients rarely want to give up their vices.
Quite simply, acute care providers have no incentive to teach people how to live healthy lives because that means less demand for the services they provide. (It’s no accident that only 4% of the NIH budget is allocated to disease prevention.)
We also have to fix the acute care system by implementing the best of both the “soft liberal” and “soft conservative” approaches. What might this blend look like? Some reformers say hopefully that it could lead us to something like the Swiss system, which requires every adult to buy insurance and subsidizes that purchase with a means test but which also leaves adults free to buy from a competitive and entirely private array of insurers and providers. Such an approach, of course, would disappoint those on the Beveridge-Plan left who insist on an all-government single-payer system--and also those on the Darwinian right who insist government do next to nothing.
Whatever we do, no new system will work unless everyone—providers, insurers, and patients of all socioeconomic status—has skin in the game.
This is what makes the AHCA’s approach so disappointing. It not only does little to address the underlying drivers of our health care cost crisis, much of what it does accomplish points in the wrong direction. The AHCA asks much of low-SES, working-class Americans. It asks nothing of affluent Americans who continue to enjoy a regressive tax exclusion subsidy worth a massive $250 billion a year. (Simply cutting that subsidy in half by capping it for the most generous health plans would get you more revenue than the GOP’s newfangled “border adjustment tax.”) And most importantly, it asks next to nothing of price-discriminating providers who can continue to charge as much can get away with to third-party payers for procedures of unknown efficacy.
The medical-industrial establishment, which will soon consume one-fifth of national income, will not be turned around without a struggle. Until all parties are pushed out of their comfort zone, a true fix will never be achieved.
