456. How to Fix the Hot Mess of U.S. Healthcare

The American healthcare system is in a state of dysfunction, with pricing failures and inappropriate care driving up costs. A national survey found that 21 percent of medical care is unnecessary, indicating where the waste is and where we need to focus. The incentives in our healthcare system encourage procedures over prevention, and the number of prescriptions issued has nearly doubled, despite no increase in disease. The industry has become massive, employing over 18 million workers, making record profits, and pricing hospital services above inflation. Insurance companies and healthcare providers are making a ton of money, but patients aren't benefiting from the system. Despite spending the biggest share of our GDP on healthcare, the US is not absurdly healthy.

Despite high rates of infant and maternal mortality, obesity, and cardiovascular diseases in the U.S., the country spends very little on prevention, with the Centers for Disease Control and Prevention only allocating $1.2 billion annually for all chronic disease prevention activities, equating to less than $4 per person. The U.S. healthcare system is fragmented, with incentives often misaligned, and calls for small steps towards better health outcomes, rather than big, bold reforms. Surgeon Marty Makary compares the fragmented system to an elevator incident that occurred at a hospital he worked at, emphasizing the need for a comprehensive approach to safety and reliability in healthcare. Good people are working in a bad system, and small changes can make a big difference.

The medical profession has a rich heritage of public service and philanthropy. However, the modern healthcare system is plagued by financial toxicity, with an estimated 20% of Americans pursued by collection agencies for medical debt. Non-profit hospitals, which make up the majority of community hospitals in the US, often operate like for-profit businesses, with top executives earning millions of dollars in salaries. This is due to the replacement of the charitable care standard with the community benefit standard, which provides looser regulations. Patients are left with a significant financial burden, while hospitals prioritize their bottom line over their original mission of caring for the sick and injured.

The tying of healthcare coverage to employment is a result of employers adding healthcare benefits as a fringe benefit during the post-World War II era. The federal tax code revision, which exempted employer-sponsored health benefits from taxes, was the driving force behind this system. This perverts the definition of insurance and influences the level of insurance coverage available. Garnishing wages of patients who cannot afford their hospital bills is a consequence of this system. While providing basic healthcare services to citizens is an appropriate responsibility of a civilized society, an honest conversation about limited resources needs to occur in America.

As healthcare costs continue to rise, more employers are shifting towards self-insurance to better care for their employees and reduce costs. Prior to Medicare and Medicaid, third parties started to pay for healthcare costs, resulting in a lack of transparency and increased hospital charges. However, the government stepped in and set a price list, causing hospitals to adjust their practices by pushing higher costs to uninsured patients and hiring consultants to treat the business like a business. With 38% of Americans covered by Medicare or Medicaid, and more than 50% through their employer, self-insurance is becoming more popular as employers take control and aim to eliminate financial middlemen. Businesses like HEB, a Texas supermarket chain, have successfully managed their employees' healthcare by self-insuring and offering a comprehensive plan that covers all healthcare needs.

The U.S. healthcare system is heavily reliant on insurance, which has resulted in a world of prepaid medical care that often leads to price gouging and predatory billing. Even individuals with healthcare insurance are not protected from exorbitant billing, as surprise billing can financially break people. The lack of transparent pricing in healthcare makes it difficult to reduce costs and erodes public trust in the medical profession. Seemingly, there should be a better way to offer better care and prevent bankruptcy from healthcare bills.

Despite the fact that many healthcare prices are negotiated in secret and patients often have no idea what they'll be liable for, the situation may be improving due to an executive order issued by President Trump in June 2019. The order requires hospitals to disclose standard charges for all services and provide prices for around 300 'shoppable' services in a consumer-friendly format. The order also requires insurers to disclose cost-sharing estimates for all covered services. While hospitals and insurers may be against the order due to increased price sensitivity for customers, evidence suggests that price transparency can lead to reductions in healthcare spending. For example, price transparency has led to a 27 percent reduction in lab-test spending and a 13 percent reduction in imaging.

Price transparency in healthcare may not necessarily reduce healthcare spending, as patients often trust their referring physicians and are not used to finding healthcare prices. However, proxy shoppers may benefit from pricing information and keep prices in check for all. Trump's executive order on price transparency has garnered attention from the healthcare industry, despite providers and payer organizations being apprehensive about it. Behavioral elements, such as habits and trust in certain individuals, play a role in healthcare spending decisions. It may take time for patients to learn about price transparency and get acclimated to using the option.

The healthcare industry's opposition to the executive order on price transparency stems from concerns regarding the confidentiality of their business-to-business contracts and the possibility of tacit collusion leading to increased prices. However, these arguments are flawed as patients have no visibility into the prices negotiated by payers and providers. Additionally, markets are much broader and highly visible, making coordinated pricing unlikely. The Trump Administration prioritized healthcare reform legislation to place the patient at the center, empowering them to have a greater role in the system and improve quality while lowering costs.

The U.S. healthcare industry is realizing the need to focus on preventing illnesses rather than just treating them, with doctors exploring alternative treatments such as healthy foods, meditation and yoga to address root causes and lifestyle reasons for bad health. However, the healthcare setup still favors treating illness over prevention, and the industry's size may hinder major reforms. Recently implemented hospital and insurance price transparency rules are a step toward reform, but the effectiveness of these measures remains uncertain as the incentives for compliance may not be large enough.

Hospitals are finding ways to avoid displaying price lists despite regulations as the fines for non-compliance are too low to be effective. However, healthcare reformers are looking towards smaller changes rather than big swings in healthcare policies to reduce unnecessary medical costs which are estimated to be around a trillion dollars per year. Yale healthcare economist, Zack Cooper, found that if patients simply went to the closest medical facility, it could have saved an insurance company $1 billion, demonstrating the impact of these smaller changes. While the Biden administration's healthcare-reform initiatives are yet to be fully revealed, it is clear that both parties acknowledge the need for cost reduction in healthcare.

The One-Percent Steps for Healthcare Reform Project focuses on identifying discrete, tangible steps to reduce healthcare costs by half or a percent, thereby reducing healthcare spending in the U.S. by hundreds of billions of dollars. The project debunks the myth that only research that saves 15-20% is worth doing, instead proposes a series of small yet effective changes. Hospitals without competitors charge higher prices with worse quality, and these hospitals comprise about 20% of U.S. hospitals. To remedy this, cooper suggests price regulation, although he initially dislikes it, to introduce meaningful competition and ultimately reduce costs.

Price regulation and constraining choices may be necessary in the healthcare system, which operates as a natural monopoly and often results in high costs for hard-working individuals. The One Percent Project suggests introducing price regulation while researchers Abaluk and Gruber propose a default option that places individuals in the best plan for their needs. Insurance companies are not solely to blame for high healthcare costs as they largely reflect the underlying costs of healthcare in the US. Profit caps have been put in place, but the way to increase profits is to grow the pie, leading to a system that raises costs rather than lowering them.

The U.S. healthcare system has a significant amount of waste and rent-seeking, which raises spending by billions of dollars annually. Policymakers need to address the political economy of the system, where constituencies benefit from this waste, in order to make meaningful changes. One example of this waste is the overpayment of long-term care hospitals, which provide no better care than other providers but receive significantly more funds. The challenge is identifying and addressing the constituencies that lose out the most from these changes, as waste in the system translates into income for someone else.

The U.S. healthcare system rewards politicians for steps that raise spending, making it difficult to achieve significant healthcare reform. However, the one-percent solution, which focuses on small changes, is starting to pay off. In 2020, President Trump signed a package that tackled surprise billing in healthcare, a research area of Zack Cooper. The package included a hold-harmless provision and a payment dispute settlement process, which were textbook examples of what can be done through small changes. Cooper's paper on the topic, published in the Journal of Political Economy, was a significant factor in the legislation. The one-percent solution is a viable approach to tackling entrenched interests and achieving meaningful healthcare reform.