As a nation, we agree on one thing (and probably just one thing) regardless of our political affiliation, race, religion, gender, sexual orientation, and age. Our healthcare system is broken. It is complex, expensive, and unsustainable. The United States spends about 18% of its GDP on healthcare which is nearly twice as much as the average for other developed nations, but with no corresponding benefit of improved outcomes to justify the expense. The enormous cost of Medicare and Medicaid is a major contributor to our national deficit. Moreover, since most of the financial burden is shouldered by the U.S. companies that provide healthcare benefits to their employees, the ever increasing costs serve as a detriment to our global competitiveness and put our nation at risk.
How did it come to this?
There are many random forces throughout history that have the guided the evolution of our current system of healthcare. While most sectors of our economy have evolved with the free market forces at work, rewarding lower costs and innovations, the healthcare sector has been guided by other forces that have had the opposite effect. Over time, they have have misaligned incentives, removed the direct consumer to provider relationship, eliminated price transparency, and left us with a system where free market capitalism cannot operate.
Before WWII, health insurance was paid by Americans citizens, not employers, just like home insurance and auto insurance are today. And like the other insurance industries, the healthcare coverage was only used for the expensive services such as major surgeries and hospitalizations which the average American could not afford. All other small dollar services, like medicines and doctor visits were paid out of pocket and a market naturally existed to provide them at a reasonable cost.
The first major factor to undermine free market capitalism was the introduction of employer-provided health insurance which began during WWII. This historical accident was born from a deal between the U.S. government and labor groups as a compromise to avert a strike. In the deal, an income tax exemption and freedom from wage controls by the government were granted to employers on the condition that the employers provide health benefits to their employees. The companies would enjoy a 100% tax deduction on the health care expenses. Notably, this tax deduction was not granted to individuals who bought their own insurance which created a strong financial incentive for Americans to abandon the self-pay model and seek healthcare from employers. Employers could leverage these benefits to attract and retain employees. This was a seismic shift that decoupled the employees' concerns for the cost of healthcare and set the United States on an irreversible course to our present situation. As the individual plans were replaced by employer provided plans, the cost of healthcare became out of sight and out of mind to the very individuals receiving the service. To the workers, healthcare expenses were now irrelevant. Now, they were the concern of the companies who paid the bills and negotiated the rates with insurance companies. For the end user employees, there was no longer an incentive to shop for the lowest price or search out the most attractive service, and the free market in healthcare collapsed.
After the war, attempts to end the tax break were made by the executive branch, but it was too late. The employer provided health industry had grown large and powerful. Also, employees and labor groups alike preferred the new paradigm. By the 1960s and 1970s, the vast majority of Americans received their health insurance through their employers and the associated tax incentives became an integral part of our healthcare ecosystem.
Another major force that has ballooned the cost of healthcare while simultaneously stifling innovation is the broad use of insurance across all price points. Unlike the auto or home insurance industries, the third party providers of healthcare extend their reach into nearly every corner of healthcare delivery, whether it be a major surgery for $100,000 or a $5 generic antibiotic. As stated above, pre WWII, health insurance only covered those expensive items that individuals could not afford. The more affordable health expenditures were left to the market and free enterprise was able to work its magic. Now, in order to fill an inexpensive prescription, Americans typically use their insurance companies as intermediaries rather than just buying directly from the pharmacy. That is like filing a claim with a car insurance company to get an oil change. Using the middleman insurance company for every small thing in this way adds complexity and bureaucracy at every turn while simultaneously reducing the options available. Since the rates are privately negotiated between the insurance company and providers, they are a closely guarded secret. That is because an insurance company, aware that a competitor has a lower rate, will demand the same. In our third party payment system, price transparency and thus free enterprise, is forbidden.
What does the lack of innovation look like?
Along the way, our third party payer and employer funded insurance models have eliminated price transparency, removed self-advocacy, and hobbled innovation. Insurance plans must precertify or preapprove goods and services to verify that they are deemed necessary and to ensure there is a contract in place on which to base the pricing. Therefore, there is no array of options from which to choose, such as a spectrum from low cost and low quality to high cost and high quality. There is one option. High cost and high quality. Any additional quality provided above the standard is not rewarded with higher payments from the insurance company. Moreover, the intrinsic bureaucracy in the insurance industry makes changes of any kind very difficult. There is no driving pressure for innovation at all. Just the reverse. In a consumer-driven free market, in stark contrast, service providers are incentivized to constantly innovate or die. Experiments take place continuously across the nation with the few surviving innovations spreading outwards and adapting to ever-changing markets. Over time, the innovations evolve the systems in ways that no one could possibly predict and are the things that truly make our country great.
Are there other problems?
There are numerous other important factors contributing to the ills of the U.S. healthcare system. Some of these include our litigious society which places strong incentives on physicians to order imaging studies and lab tests to protect themselves from lawsuits. Also, physicians that are employed by hospital systems are strongly encouraged or even mandated to order much higher cost lab tests, imaging studies, and procedures from their own systems which may cost four or five times more than an identical service performed by a non-hospital competitor. Hospitals, though, need high charges for their services to support their high overhead. One of many causes of the high overhead is that hospital emergency departments are mandated to provide care to the indigent. In return, the government have granted price advantages to hospitals, paying them more than they would to an outpatient facility offering an identical service.. Moreover, state governments have created anti-competition laws (i.e. certificate of need laws or CON laws) that hinder or altogether eliminate competition and allow hospitals to enjoy high priced monopolies in 35 of the 50 states. The “free” care provided by emergency departments is many times more expensive than it should be and ultimately increases the cost of healthcare for everyone. Removing competition and inflating the cost of health care services to benefit hospitals is a poor, indirect solution to the complex problem of making care available to those who cannot afford it.
Is there any hope?
The power of market capitalism to drive innovation and reduce costs has been the key to our success in most systems outside of healthcare. To have great affordable healthcare and stay competitive as a nation, we need a system with incentivized, educated consumers in an open market with price transparency. This can only happen when individuals, not employers, pay for their health insurance just like they pay for their own car insurance and home insurance – and just like they pay for their all their other goods and services. Companies will be free of the heavy burden of providing benefits to employees, allowing them to focus on the business. At the same time, individuals will no longer be locked in, unable to change companies out of fear of losing their health insurance. They will be free to move more easily between jobs and have greater control over their healthcare. With empowered individuals and choices, a market will be free to develop. This critical shift will be possible if the tax deductions for healthcare coverage are granted to individuals, not just to corporations.
The second change is to use health insurance only for catastrophic events. All transactions under a given dollar amount should not be processed through insurance nor counted towards a deductible amount. Cutting the expensive bureaucracy out of the smaller health related transactions would simplify the lives of patients and providers alike while making plans much more affordable. The consumer paying for most of the health care expenses out of pocket would only seek medical care when it is truly needed, decreasing utilization. When care was necessary, consumers would be empowered to shop for the best price. Competition would then drive down cost and increase options as it has in other service sectors.
With anti competition laws and price advantages removed, all service providers would be free to compete on a level playing field. Hospitals would focus on providing care to patients requiring hospitalizations and major surgeries and leave the non critical care to the smaller entities that can deliver it more cheaply and efficiently.
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