When will we deal with the cost of health care, really? (Part 3)

Published on
November 14, 2017

In my two previous posts, I offered a top-10 list of reasons why the costs of U.S. health care continue to increase. Describing the problem is the easy part. But what can we do about it? And what role can federal legislation play in getting us onto a more affordable course?

The answers fall into two big clusters:

1. A series of well-aimed laser shots, targeting specific cases of unnecessary care, pricing or inefficiency.

2. A systematic approach that changes the fundamental incentives and culture of the health care system and its actors.

Laser shots. Most of us spend most of our time identifying and shooting at the big, fat targets. Let’s cut down on unnecessary imaging for back pain and prescribing of brand name drugs when generics are available. Let’s negotiate bundled prices for total joint replacements, and get more patients to choose primary care doctors and enroll in accountable care organizations.

In fact, there are many excellent lists of these laser shots, and every idea on these lists has been shown to work. Nevertheless, the cost of care in the U.S. continues to run about double other countries and maintains an annual trend higher than most.


For one thing, each actor has learned how to give a little in order to gain a lot. A hospital might agree to a bundled payment with one small customer, knowing it can compensate for that discount by raising rates on other customers. A pharmacy benefits manager can offer brand name drugs at a favorable out-of-pocket price to the patient, knowing it will recoup far more from its manufacturer rebate. The result is an intricate web of offsetting deals that make it impossible to rationalize the financial impact on the patient or purchaser.

Secondly, few of the “laser shots” are ever fully realized at scale. They remain pilots or isolated programs driven by local innovators. That’s because while motivated, often idealistic, innovators can derive value and even make money with these new programs, the underlying financial basis of hospitals and medical practices does not reward those models. At least not so long as the fee-for-service model of payment beckons.

The past several decades have taught us that worthwhile small-scale innovations will not lead to sustained savings and transformation. We need comprehensive proposals. Bill Clinton thought we needed “managed competition” between insurance companies; Paul Ryan thinks we need consumers to make individual health care decisions, using health savings accounts and Medicare vouchers; Bernie Sanders says we need the government to pay all health care bills. 

Today, all three of those comprehensive solutions are in place in the U.S. Medicare is a single-payer system for about 16 percent of the total population. Roughly 30 percent of all employer-sponsored coverage (which provides insurance to about 48 percent of the U.S. population) is in a consumer-directed health plan, with high deductibles and, therefore, significant consumer decision-making responsibility and cost consciousness. And we see managed competition in both public and private insurance exchanges and in the offerings that some employers provide their workers, who choose from a menu of health plans and even ACOs.

How well does this collage of inconsistent payment arrangements work to control costs? Not well. Because they co-exist, those who provide and manage care don’t get a consistent economic signal of what to do, and there is no single source of truth about which services or models of care have value. And each approach has at least one major flaw: Medicare provides no constraint on utilization. A consumer-driven health plan has no effect on prices and discourages people from seeking both inappropriate and beneficial care. And managed competition among insurers requires a regulatory framework to set standard benefits and consumer-friendly quality comparisons, which are generally lacking other than in a few of the Obamacare exchanges.

So the debate continues about which, if any, model should become the dominant one across the entire population. Each has its fans. Many patient and consumer organizations like the idea of single-payer. Insurance companies and large provider organizations like managed competition. And doctors and employers generally like consumer-directed health plans.

This heated debate suggests what really differentiates these plans from one another. They are really about allocating power. Single payer isn't about how the money flows — it's about who makes the rules for which behaviors will be rewarded and which prices will be paid. In our highly polarized and ideological environment, should these decisions be subject to our political process?

Managed competition seemed to be a more American solution. We want competition — yes.  But we don't want the risks of raw competition between insurance companies because it could be a race to the bottom that would harm people. So we need someone to "manage" it, and that leads to vigorous disagreements about who that should be.

The idea of consumers making financially informed decisions about their own care sounds consistent with our desire for each American to have power over his or her own life decisions. But in today’s world of astonishing medical complexity and incredibly high costs, consumers seem to be overwhelmed and sometimes willing to forego care rather than find themselves unable to pay the rent or grocery bill. Shopping for health care is tremendously hard.

Systematic approach. Choosing among these options or developing new ones won’t happen through a marketplace free-for-all. We’ve already tried that. In fact, every country that has more successfully managed health care costs has chosen a path of self-discipline. They have recognized that a healthy population is an essential prerequisite to an economically successful society and to offering its people meaningful lives. People have chosen to trade chaotic freedom for shared commitment.

Since 1984, Singapore has used a consumerist model that allows people to choose their care and providers, but the country uses mandatory payroll withholding to pay for it and selective government price controls so that care is actually affordable. England accepts higher personal income taxes and government controls on the supply of care in exchange for a universal, public delivery system, launched in 1948. Japan has required everyone, since 1961, to have either employee-based or public insurance.

In every case, the national government has defined a set of balanced and comprehensive rules, with a few tightly governed intermediaries, to achieve affordable access to health care. For all our aspirations for a “market-driven” health care system, the reality is that competition and markets can only work within social constraints. And that structure must be determined at a national level.

Our political and thought leaders need to start this kind of discussion, perhaps quietly for now. We need them to turn down the quick-fix rhetoric and focus on the kind of system-wide changes that would really control our ever-rising health care costs.


Related posts

When will we deal with the cost of health care, really? (Part 1)

When will we deal with the cost of health care, really? (Part 2)