By Saeculum Research
House Republicans recently unveiled their long-awaited Obamacare replacement, termed the American Health Care Act (AHCA). The stakes have never been higher: The proposed Affordable Care Act (ACA) makeover is just the latest act in a series of health care “reforms”—large and small, stretching back decades—that are ostensibly designed to control costs but in the long run do nothing to slow the health care spending juggernaut. So let’s step back and take a broader look.
What will work? The left says the answer is more government control; the right says the answer is no government whatsoever. The ultimate plan will be neither. It will lie somewhere in the middle, a combination of policies that will make markets work better and structural changes that will incentivize savings.
U.S. health care spending continues to soar. The latest data from the Altarum Institute indicate that total annualized health spending topped $3.4 trillion in December, accounting for 18.2 percent of GDP—both all-time highs. Thanks largely to the ACA, federal and state governments have taken on an ever-greater share of this cost burden. Updated projections show the Medicare trust fund running dry by 2028, two years earlier than previously estimated. And as we’ve mentioned before (see: “Medicaid for the Middle Class?”), Medicaid has accounted for the greatest share of all coverage gains since the ACA’s rollout.
The government is not the only party for whom health costs are skyrocketing. From 2007 to 2014, the amount spent on health care by a middle-income household jumped up 25 percent. 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 U.S. employees in high-deductible plans has more than doubled to 29 percent.
What’s causing this spending explosion? Population-level effects are one driver. Because of lifestyle factors such as stress, high-sugar diets, and lack of exercise, Americans are less healthy than other developed nations—despite our much larger per-capita expenditures on acute treatment. 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. While mortality continues to decline in other high-income nations, it’s recently plateaued in the United States—and actually rose in 2015. (See: “More Deaths, Fewer Births.”) Rapid declines in the life expectancy of non-college middle-age whites are nothing short of alarming.
Industry-level effects are also at play. A combination of market concentration, high barriers to entry, regulatory bias, and lack of transparency enables providers to price-discriminate. The biggest national showcase of these issues is Big Pharma. (See: “Soaring Drug Prices Raise Tough Questions.”) Despite regulatory controls, drug companies continue to influence which drugs physicians prescribe. 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. Regional differences in the price and frequency of any given medical procedure are also troubling. These divergences are catalogued yearly by the Dartmouth Atlas of Health Care.
Yet system-level effects are perhaps most to blame for high U.S. spending. America’s cost-plus “fee-for-service” model incentivizes patients and providers to bill third parties (government and insurers) for whatever care they agree is needed. 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 and leads to physician burnout. (See: “Goodbye, Dr. Welby.”) 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 percent 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.
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 not going far enough (by allowing refundable tax credits) 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, while even fewer believe that government should be completely uninvolved with care provision.
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 pricing; allowing insurers to operate across state lines; banning back-door industry subsidies; beefing up 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 tax exclusion, remain controversial even among Republicans.
The “softer” liberal approach would be to reorganize the delivery model in a way incentivizes providers, rather than patients, to become more cost conscious. One first step toward this goal is 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). 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.
No matter which system ultimately wins out, it will not work unless everyone—providers, insurers, and patients of all socioeconomic status—has skin in the game. The AHCA asks much of low-SES, working-class Americans. It asks comparatively little of affluent Americans who continue to enjoy a regressive tax subsidy and now get further tax cuts. And most importantly, it asks 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.
- Watch out: Despite the ACA and its impending repeal, U.S. health care costs will continue to soar. By every measure, U.S. health spending has been on the rise lately. But “repeal and replace” alone won’t solve this problem: High health costs are largely rooted in our fee-for-service health care model that does nothing to curb overspending. The most commonly proposed solutions are partisan extremes (single-payer or free-market) unlikely to fly. Instead, the likely fix will come from somewhere in the middle. But beware: A true fix will require buy-in from all parties—consumers, regulators, and health care professionals alike.
- Don’t assume a correlation between health care spending and actual health. Population health is determined mostly by public health infrastructure and lifestyle habits (diet, exercise, drug abuse)—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.
- Expect the United States to continue to close the gap on the rest of the world in terms of health. U.S. citizens are notorious for their high consumption of sugar and fat, as well as their high rates of opioid abuse. Yet there’s reason to believe that the health gap between the United States and the rest of the world will continue to narrow, simply because the world is growing less healthy. Rising affluence across the globe is leading nations to adopt westernized diets that will cause ever-higher rates of chronic disease. We’re already seeing this to some extent with smoking rates, which peaked early in the United States and are now falling domestically as they’re rising abroad. (See: “How (and Where) to Bet on Big Tobacco.”)
- Watch for more health advocates to emphasize preventative care. Prevention gets very little run in today’s health care world. Research shows that few physicians bother teaching prevention due to lack of “compliance”—meaning, patients rarely want to give up their vices. Meanwhile, a miniscule 4 percent of the projected 2017 budget for the National Institutes of Health is devoted to disease prevention. But some organizations are betting on prevention as a way to reduce health costs. The Centers for Medicare & Medicaid are currently testing the efficacy of “accountable health communities,” which aim to improve community outreach and quality of life for at-risk individuals.
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