The current system of health care financing is hopelessly complex.
“I’m going to stay here until there’s really not a hope of getting it anymore,” said Jesus Neave.
Jesus is referring to the kidney dialysis treatments he has been receiving three times a week at Grady Memorial Hospital. The hospital had just decided to close its outpatient dialysis unit. Grady Memorial is an Atlanta public hospital. Like many public hospitals that serve the poor, it was in dire financial straits, with a multi-million dollar deficit.1
Jesus crossed illegally into this country from his native Mexico in 1992. Four years later doctors told him he had kidney disease.
With the closing of the hospital’s dialysis unit, Jesus was left with few options. Grady encouraged him to return home to Mexico for treatment. But, as Jesus explained to a reporter, “Mexico is my country, but over there if you don’t have money, the doctors won’t treat you.” As a maintenance worker, Jesus does not earn enough money to pay for his own treatment.
Another patient at Grady’s dialysis clinic, Cruz Constancia, said much the same about her home country of El Salvador, “People die very fast. The way it works down there is that if you do not have money, they don’t put medicine in your machine.”
Grady’s outpatient dialysis unit treated about 50 patients in the same situation as Jesus and Cruz. These patients are poor and almost all undocumented, so they are not eligible for government programs like Medicaid. The typical thrice-weekly treatment costs the hospital $50,000 a year for each patient.
Few of Grady’s dialysis patients made any effort to return to their home countries. They believed it would be futile. Besides, many said their families and friends all lived in this country. In the end, Grady Memorial agreed to pay for services for these patients at a private dialysis clinic….at least for one year. The hospital managers know that if these patients present themselves at Grady’s emergency room, the hospital will be required by federal law to treat them there, and dialysis in the emergency room is more expensive than in a specialized dialysis clinic.
It is not clear how Grady can afford to continue paying for dialysis treatments, given its poor financial state and its mandate to serve other indigent patients as well.
What happened at Grady Memorial Hospital illustrates the essential dilemma of our nation’s health care system. In an ideal system, everyone who needs care gets it. In practice, we come up against staggering costs that stymie that goal. Along the way, we face agonizing moral choices.
There was a time not long ago when no one thought it was government’s job to pay for health care. If there were health care bills to pay, family or friends would step up, or the patient would do without, often with dire consequences. It wouldn’t have seemed right for the government to tax strangers—-to take part of their hard-earned wages—-to pay for another family’s medical bills. Today most people expect just that.
What Is The Problem?
How should we finance our American health care system? No other public policy issue has been a greater source of controversy among policy makers, politicians and the public. I am not an expert, but in this post I will lay out some of my ideas on the matter.
It is important to correctly identify the problem. The problem does not lie in the quality of medical services. American physicians and hospitals provide a sophisticated level of care that is the envy of the world. People who can afford it come to the U.S. for treatments that are substandard or unavailable in their home countries. The problem, in a word, is cost.
Studies have shown that medical services in the U.S. are far costlier than comparable services in other countries, even though measures of our national health (such as life expectancy and infant mortality) are below those of countries that spend far less on health care.2 Today we in the U.S. spend almost 18% of our Gross Domestic Product on health care and that is expected to rise to nearly 20% by 2025.3 If healthcare costs continue to rise, eventually we will need to spend the majority of GDP on health care. That is impossible because we have other essential priorities—-debt obligations, defense, and education, to name just three.
The core dilemma in health care financing is that public expectations about the kind and scope of health care that can be provided by society are wholly unrealistic. How did this come to be? Politicians figured out long ago that a sure-fire way to remain in office is to promise their constituents that the government will subsidize their medical costs. Elected leaders make promises that can’t be kept…at least not for long.
We can see this in the way Medicare, the government insurance program for older people and the disabled, has changed over the years. It would be political suicide for politicians to “cut Medicare.” But Medicare costs are such that the system is unsustainable. For a while, introducing measures to increase efficiency worked, for example, by changing the way hospitals are reimbursed for care (payment based on patient diagnosis rather than service rendered). But as the Center for Medicare and Medicaid Services (CMMS) wrings inefficiencies out of the system, there is less and less room to save additional costs.
The result has been a stealth campaign to limit Medicare services or to cut benefits, although the changes are never described in this way. For example, CMMS has placed limits and restrictions on the amount of money they will pay for physical therapy. They have engaged in “utilization review” of hospitalizations, ruling in some cases that patients’ hospital stays were not “medically necessary,” thereby shifting costs to patients. They have limited or cancelled coverage for some drugs. I expect this trend to continue. The key to keeping the system going is to bleed the system slowly so that the public will not grow angry enough to vote against the politicians. But at some point, this stealth campaign will become apparent to the public. It is anyone’s guess what will happen then.
Another part of the healthcare puzzle concerns the cost of providing care to people who are in the U.S. illegally. Estimates vary, but there are probably 11 to 13 million such persons today. They are not eligible for government program like Medicaid, but they do use emergency rooms and free clinics. In 1986 Congress passed the Emergency Medical Treatment and Labor Act (EMTALA). This legislation created a legal obligation for hospitals to provide emergency care to all persons who come to emergency rooms regardless of their ability to pay. Hospitals must provide care to these patients or arrange transfer to a facility that can provide needed care. As a result, hospitals have absorbed large unreimbursed costs for care of undocumented patients.4
A 2010 report found that Texas hospitals incurred an estimated $717 million in costs of uncompensated medical care given to undocumented immigrants in the state’s public hospitals. The report also showed that the state of Texas spent $118 million for pre-natal care for children of undocumented immigrants. Once these children are born on U.S. soil, they are citizens and qualify for public benefits such as Medicaid.5
Although these costs are substantial, there is reason to believe that undocumented persons use fewer healthcare services than those who are in the U.S. legally. For example, although the undocumented were 12 per cent of the non-elderly population of Los Angeles County in 2000, they accounted for only 6 per cent of healthcare spending. Compared to others, undocumented persons used fewer healthcare services and contributed less to healthcare costs in relation to their proportion of the population. This is probably due to their relatively better health and lack of health insurance.6
Are healthcare expenditures for undocumented persons justified? It depends on a person’s perspective. Some people believe that because undocumented persons are here illegally, they should receive no public benefits. Others point to the fact that undocumented persons perform essential labor and so are deserving of the same care given to others. In any case, our moral values require that we provide some level of care to people in need, no matter their circumstances.
Why Are Health Care Costs Rising So Much?
It will help to understand why health care costs are rising more rapidly than the nation’s ability to keep up. As President Trump admitted recently in the face of Congress’ inability to pass a reform of his predecessor’s Affordable Care Act, “It is complicated.” I’m not a health care economist, so all I can offer is a layman’s perspective about rising costs.
Most of health care is paid for by government or by private insurers. That has meant in practice that patients do not feel the full impact of their health care spending. This has encouraged patients to spend more than they would have otherwise. Most financing mechanisms try to avoid this by requiring patients to pay deductibles (the initial amount to be paid before benefits kick in) and coinsurance (a portion of costs, often 20 per cent). But deductibles and coinsurance have had only partial success. For the price of a secondary insurance policy, millions of Medicare patients effectively avoid deductibles and coinsurance. Because of this, patients have little incentive to economize as consumers of health services.
A part of health care inflation really isn’t inflation at all, because increased costs often represent additional and improved services. Researchers develop new drugs and new technologies that enhance health care outcomes. But these innovations are expensive—often very expensive. For example, patients with metastasized prostate cancer have a new drug —-Provenge—-that will prolong their lives for a few months. But the cost is staggering. On average, the drug will extend life for four months and cost $93,000.7 There are new costly innovations in every area of medicine: scanning technologies and other diagnostic techniques, surgical technology, and so on. Consider for example, that a Magnetic Resonance Image scan, which is now routinely used for minor and major medical problems, is many times more costly than the old standard X-ray. And the recently popular robotic surgery is a great medical advance, but requires the purchase of expensive machinery and extensive physician training.
“Defensive medicine” practices also fuel health care inflation. Providers, sensitive to dangers of malpractice lawsuits, often choose to perform an excessive number of tests or treatment procedures as a way to defend themselves against charges of negligence.
Practices of Big Pharma
I’ve already mentioned the cancer drug Provenge. Many other drugs are likely more expensive than they could be. For one thing, large pharmaceutical companies have the financial resources to lobby Congress for laws that protect their profits. The Affordable Care Act (ACA) was the result, in part, of a devil’s pact between Big Pharma and the Obama Administration: In exchange for Big Pharma’s support for the ACA, Congress agreed to pass a law making it illegal for U.S. consumers to buy drugs outside the country. This keeps drug prices high. There is another perspective on this issue: Many foreign countries enforce price controls on drugs. To make up for these restricted prices in other countries, pharmaceutical companies keep their U.S. drug prices high.
The government allows pharmaceutical companies a period of several years of high prices for new drugs (called brand name drugs), ostensibly to incentivize companies to innovate and to recoup their considerable research and development costs. But pharmaceutical companies often artificially extend this period by unnecessarily tweaking their drug formulas or combining old drugs into a new form, and then claiming these drugs are “new” and thus eligible for higher brand name pricing. Older drugs, whose initial period has expired, are cheaper. They are called generic drugs. (I myself use an old generic drug that has been tweaked into a very expensive new brand name drug: an eye medication called Restasis. Restasis is nothing more than an old generic drug called cyclosporine. However, the FDA considers it a “new drug” because, in the form of Restasis, it is delivered as an eye drop rather than a pill. This way the manufacturer gets to charge a high price even though it did not incur development costs for creation of the drug—–although it did incur costs to test the safety and efficacy of the new formulation.)
The U.S. is one of only two countries to allow Direct to Consumer advertising of pharmaceutical drugs that includes health claims.8 This raises costs because patients see advertisements for these drugs and then demand prescriptions for them from their doctors. Patients then consume expensive brand name drugs when cheaper and effective generic alternatives are available.
Complexity and Administrative Overhead
The current system of health care financing is hopelessly complex. There are many hundreds, perhaps thousands, of “third-party payers” such as various federal and state government agencies, the military, Blue Cross and Blue Shield (there are many of these across the country), health maintenance organizations, and a host of private insurance companies. Any one of these payers may administer several plans with different reimbursement rules and rates. Often, as in the case of many Medicare patients, part of the payment is assigned to Medicare and another part to a secondary insurer. Payment rules and rates are so complex that an entire profession has grown up around processing health claims: “medical billing specialists”. Of course, all of this costs money.
A proposed solution is the single-payer health plan. In this plan, the federal government pays all healthcare bills. A single payer system would rationalize and standardize reimbursement and reduce administrative overhead. However, I am skeptical that it would reduce total costs. I believe a single payer government program would result in higher use of services and less efficiency, which would overwhelm any savings in administrative overhead. It is a given that when a large flow of government money is directed at any segment of the economy, that segment experiences greater-than normal inflation. One example of this is the precipitous increase in the cost of medical care that accompanied the introduction of Medicare and Medicaid in 1965. There are additional examples of this phenomenon in other sectors of the economy.
“Coordination of care” is another hot-button issue in health care. Because our health care system is fragmented, many patients receive care from multiple providers in multiple settings. Although the situation has improved since passage of the ACA, with its requirements for electronic record keeping, patients may receive duplicate medical tests or treatments from providers who are not familiar with the patient’s medical history. This is especially true for patients with multiple, chronic conditions, who have several providers.
What Really Determines Our Health?
The “health care debate” has consumed a great deal of media attention, and has focused almost exclusively on health care financing. It is not surprising then, that most people believe the medical care we receive determines how healthy we are. But other factors are far more important. Here is my wish list for a healthy populace: good air and water quality; availability of healthful foods; balanced diet; safe workplaces; vehicle safety; responsible alcohol consumption and avoidance of street drugs; maintenance of a healthy weight; and low levels of violence in schools, workplaces and neighborhoods.
Over the most recent Fourth of July weekend, 100 people in Chicago sustained gunshot wounds. I don’t know of anyone who has tallied the cost to our health care system. But most of these gunshot victims survived and required medical care. The cost must have run into many millions of dollars…and this in just one American city on one weekend. Another example that has received media attention: Babies of crack cocaine-addicted mothers are born with multiple health problems and are themselves addicted to cocaine. Treating these babies costs the U.S. health care system millions of dollars a year.9 This cost is borne by the state and federal governments, that is, by working taxpayers.
Is Government the Answer?
Many people believe that a government run health care system would be a panacea. But government has a history of working at cross purposes. For example, until 2014 the federal government subsidized the growing of tobacco. At the same time, through Medicare and Medicaid, it paid millions of dollars for treatment of tobacco-related diseases. The federal government continues to subsidize the cultivation of corn, which is then used to raise beef and to add corn syrup to countless foods that consumers eat every day. But eating corn-raised beef is linked to cardiovascular disease and corn syrup to diabetes—two health conditions that consume a great portion of our national health care bill.
While liberals advocate for government-run health care, conservatives promote a free-market for health care services. For example, while liberals want Medicare for everyone (a single payer system), conservatives support Health Savings Accounts which provide tax incentives for patients to set aside their own dollars that they then use to buy health care on the private market. I’ve already discussed the drawbacks of a government-run single payer system. But would a free market approach be better? Perhaps. But the nature of health care spending does not fit well into a free market model.
A free market model works when the parties to a financial transaction have complete information about the good or service to be exchanged, including price. A free market also requires that the parties be free to make the exchange or not. Based on their knowledge and needs, the parties to the transaction may believe they can get a better deal elsewhere. This competition leads to more fair and efficient outcomes.
But the purchase of medical services does not work this way. Health care services require specialized medical knowledge that few patients have. In addition, in the current system, patients often find it difficult or impossible to determine the price of services. Providers charge wildly varying prices for the same service, depending on who the purchaser is. Finally, much of health care is delivered when the patient is in distress or does not have an easy option to “shop around” for the best deal. All of these factors generally work to the advantage of the provider and the disadvantage of the patient or payer.
A Few of My Ideas
In this post I have reviewed what I believe are some of the critical issues that must be considered in the design of any system of health care financing and delivery. Although I have studied and thought about this issue for decades, I don’t know what a fair, effective and efficient solution would be. But I can offer a few of my ideas.
- Discard the idea that health care is a right. Neither society nor its representative, the government, is morally obligated to provide health care. The notion that people are “owed” a service—-no matter how essential—- is inconsistent with American values of personal responsibility and freedom from government interference.
- Patients who can afford better care should get it. Allow providers to offer better care to those who can afford it. It is not immoral to allow a person who has guarded his health, worked hard and saved, to purchase better care than a person who has done none of those things. My proposal, of course, necessitates a two-tiered system of privileged and underprivileged patients. So what. Every other sector of the economy works this way. And if we are honest, we will admit that we have always had a two-tiered system of health care, with affluent patients paying for health care through private insurance and poor patients through government programs (although Medicare has changed this somewhat for the elderly and disabled).
- Ensure that, for adults, there is a link between personal behavior and personal responsibility. People who ruin their health through irresponsible behavior should not expect others to pay to remediate the damage they have caused to themselves. Is it fair for taxpayers to pay for dentures for a long-term methamphetamine addict when that addict knew full well that his drug habit would ruin his teeth? Should taxpayers foot the bill for knee replacements for adults who are obese? Should a hospital cover the cost of a lung transplant for a life-long smoker? Every choice we make about who and what is covered has an impact on the costs incurred by others. I am not suggesting that the government should interfere in the choices people make about drug use, diet or smoking. People should be free to do with their bodies what they like. But they have no moral grounds to force the rest of us to pay for the consequences of their negative health behaviors.
This idea may sound far-fetched today. But as the population ages and health care inflation continues to put more and more care out of reach, tough choices will have to be made about who will be covered by social programs and who will not. Or, as one health economist posed the essential question of health care financing, “Who shall live?”10 We already see a hint of this approach in the health insurance policies of large businesses, some of which now charge higher premiums to employees who are obese, smoke, or refuse to participate in health programs. Coercive? Yes, but these sorts of choices are inevitable in an economy of limited resources.Government should mandate policies that promote good public health, thereby reducing health care costs. The Clean Air Act and the Clean Water Act are examples of such policies, as are all policies that promote a healthy environment and safe food supply. Government should avoid all subsidies for growing corn and tobacco. It should promote workplace and transportation safety.
- Insurance companies will likely have a role to play in health care financing for a long time to come. If the government guarantees a profit for insurance companies it is fair to insist that those profits be reasonable and that company executives are not paid exorbitant compensation at the expense of policy holders. We already use this model for the regulation of essential public utilities such as gas and electricity.
- Congress and state legislatures should pass meaningful campaign finance reform. Today powerful players such as pharmaceutical companies, medical device manufacturers, doctors’ groups, long-term care providers and hospital associations can influence the legislative process in ways that serve the profits of these special interests, but work against the public interest. It is wrong that a phone call from a powerful senator to the Food and Drug Administration can quash the FDA’s efforts to regulate a pharmaceutical company. Or that politicians can effectively be bribed to prohibit American patients from buying pharmaceuticals from foreign countries, as I mentioned above. Meaningful campaign finance reform would make these sorts of influences illegal and restore the role of government in protecting the interests of its citizens.
- Some pundits have suggested that the government’s role in health care should be limited. That is, government should guarantee only a basic level of service—-perhaps emergency, preventative, and catastrophic care. Patients would be responsible for all other costs, which they could cover out-of-pocket or through private insurance and employer plans.
- Government’s goal should be to empower people to pay for their own health care to the extent possible. A case can be made for government funding of care for children and the mentally incapacitated, who cannot be held responsible for the choices of their parents or caretakers. For adults, government should promote private mechanisms that can reduce costs to patients. These mechanisms might include Health Maintenance Organizations in which patients pay a set fee for all services (capitation), or patient cooperatives, modeled after farmers’ cooperatives, which can negotiate bulk pricing for its members. Government subsidies could be used to increase the supply of providers, especially physicians, which would enhance competition and thus lower costs to patients.
There is no ideal way to finance health care. Nor will it be possible for any government or group to provide every health care benefit that everyone wants. But if we think carefully about how to improve our current hodge-podge system of financing we might just come up with a sustainable health care system that meets the needs of most people most of the time.
- Sack, K. Reprieve Eases Medical Crisis for Illegal Immigrants. New York Times. January 5, 2010. Retrieved August 8, 2017 from: http://www.nytimes.com/2010/01/06/us/06grady.html?action=click&contentCollection=Money%20%26%20Policy&module=RelatedCoverage®ion=EndOfArticle&pgtype=article
- Khazan, O. U.S. Healthcare: Most Expensive and Worst Performing. The Atlantic. June 16, 2014. Retrieved August 7, 2017 from:
- National Health Expenditure Data. Centers for Medicare and Medicaid Services. December 6, 2016. Retrieved August 7, 2017 from:
- What Illegal Immigrants Cost Our Healthcare System. Association of Mature American Citizens. November 4, 2016. Retrieved August 8, 2017 from: https://amac.us/illegal-immigrants-cost-health-car
6. Goldman, D.P., Smith, J.P., & Sood, N. Immigrants and the Cost of Medical Care. Health Affairs. Retrieved August 8, 2017 from:
- Hutchison, C. Provenge Cancer Vaccine: Can You Put a Price on Delaying Death? ABC News, July 29, 2010. Retrieved August 7, 2017 from:
- Ventola, C.L. Direct-to-Consumer Pharmaceutical Advertising: Therapeutic or Toxic? Pharmacy and Therapeutics, 36(10), October 2011, 669-674, 681-684. Retrieved August 7, 2017 from: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3278148/
- The Economic Costs of Alcohol and Drug Abuse in the United States-1992. National Institute of Drug Abuse. National Institutes of Health. Retrieved August 7, 2017 from:
- Fuchs, V. Who Shall Live?: Health, Economics and Social Choice (Second Expanded Edition). World Scientific Publishing: Singapore, 2011.