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 US companies that provide healthcare benefits to their employees, the ever increasing costs serve as crippling 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 insurance and the delivery of health services. While most other sectors of our economy evolved with the free market at work, rewarding lower costs and innovations, the healthcare sector diverged, guided by forces that have done just the opposite. Over time, they have have mal-aligned incentives, removed the direct consumer to provider relationship, and eliminated price transparency, leaving us with a system where free market capitalism cannot operate.
Before WWII, health insurance was paid by Americans out of pocket, just like home insurance and auto insurance are today. And like the other insurance industries, the healthcare coverage was only for expensive items such as major surgeries and hospitalizations which the average American could not afford. All other small dollar services 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 US 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 contingent 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 were able to use leverage from providing these benefits to attract and retain employees. This was a seismic shift that decoupled the employees concern 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 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 70s, 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 3rd party payment system, price transparency and thus free enterprise, is forbidden.
What does the lack of innovation look like?
Along the way, our 3rd party payer and employer funded insurance models have eliminated price transparency, removed self advocacy, and hobbled innovation. Insurance plans must precertify or pre approve goods and services to verify that they are deemed necessary and to ensure there is contract in place on which to base the pricing. Therefore, there is no array of options from which to choose, such as 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 incentivised 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 US 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 4 times more than an identical service performed by a non hospital competitor. Hospitals, though, must to resort to such tactics as much needed revenue sources in order to survive. One of many reasons is that hospital ERs must provide care to the indigent who visit the ER and absorb the significant legal and financial burdens. In return, the government 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 referred to as certificate of need (CON) laws that cripple or altogether eliminate competition and allow hospitals to create high priced monopolies in some markets. The “free” care provided through the ER is many times more expensive than it should be and ultimately increases the cost of healthcare for everyone. Hindering competition and paying high prices to hospital based providers is a poor, indirect solution to the difficult problem of making care available to those who cannot afford it.
Is there any hope?
The power of market capitalism power 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 incentivised, 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 own televisions and food. Companies will be free of the strange burden of providing benefits to employees, allowing them to focus on those things that are vital to their success. At the same time, individuals will no longer be locked in. They will be free to move between jobs without losing coverage and will 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, or if they are stopped altogether.
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 so many smaller health related transactions would simplify the lives of patients and providers alike and make the catastrophic plans much more affordable. The end users, now paying for most of the bills would only seek medical care when it is truly needed, decreasing utilization. When they did require care, they would be incentivised to shop from an evolving array of options which would become less expensive over time.
With anti competition laws and price advantages removed, all service providers would be free to compete on a level playing field. Hospitals may find it best to focus on providing high level care to those patients requiring hospitalizations and major surgeries and leave the less critical care to the smaller entities that can deliver it more efficiently.
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