Health industry stocks plunged on Tuesday with word that corporate powerhouses Amazon, J.P. Morgan, and Berkshire Hathaway were partnering to create a new, nonprofit company to “focus on technological solutions to provide coverage for U.S. employees at a lower cost.” But if Jeff Bezos, Warren Buffett, and Jamie Dimon were less than clear about precisely what their new venture will do, their bottom-line objective to help corporate employers like themselves dramatically reduce the cost of their workers’ health care is straightforward. With a combined market capitalization of $1.5 trillion and 1 million employees, their potential savings are enormous. CNBC sources claimed that “this effort can cut J.P. Morgan's annual $1.25 billion medical expense by up to 20 percent.”
Whether the new entity will use its combined buying power to drive down the cost of treatments; negotiate drug prices; or pioneer a technology platform for real-time cost comparisons, insurance customization, and health record management (i.e. “Amazon Health Services” or “AHS”) is still to be determined. As Amazon founder and CEO Bezos put it:
“The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty. Hard as it might be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort. Success is going to require talented experts, a beginner’s mind, and a long-term orientation.”
Or as Buffett, the Berkshire Hathaway chairman and CEO explained:
“The ballooning costs of healthcare act as a hungry tapeworm on the American economy. Our group does not come to this problem with answers. But we also do not accept it as inevitable. Rather, we share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes.” [Emphasis mine.]
But with all due respect to the Oracle of Omaha, there is already an answer to this problem, one which America’s economic competitors discovered years ago and still share today. Whether in the nationalized system of the UK, the single-payer systems of Canada’s provinces, the mandated health savings accounts in Singapore, or the universal coverage regimes nevertheless dependent on private insurers in France, Germany, Switzerland, and Japan, the solution for cost control and price transparency is the same. Whether negotiated directly or through a national association of insurers, the government sets the prices for prescription drugs, tests, treatments, hospital stays, and pretty much everything else.
It is precisely this “all-payer rate setting” (and not single-payer) which unites the health care systems of the leading “developed” nations. Conversely, its absence is what makes American health care sadly exceptional. As Austin Frakt and Aaron E. Carroll summed it up last month (“Why the U.S. Spends So Much More Than Other Nations on Health Care”) in the New York Times, “Studies point to a simple reason, the prices, not to the amount of care.”
The United States spends almost twice as much on health care, as a percentage of its economy, as other advanced industrialized countries — totaling $3.3 trillion, or 17.9 percent of gross domestic product in 2016.
But a few decades ago American health care spending was much closer to that of peer nations.
What happened?
A large part of the answer can be found in the title of a 2003 paper in Health Affairs by the Princeton University health economist Uwe Reinhardt: “It’s the prices, stupid.”
(For more on that theme, see Sarah Kliff here.)
As Frakt and Carroll go on to explain, subsequent studies published by the Journal of the American Medical Association (JAMA) and other sources similarly show that it is uniquely high U.S. health care prices, and not the amount of care Americans consume or have delivered to them, that sets our nation apart:
Though the JAMA study could not separate care intensity and price, other research blames prices more. For example, one study found that the spending growth for treating patients between 2003 and 2007 is almost entirely because of a growth in prices, with little contribution from growth in the quantity of treatment services provided. Another study found that U.S. hospital prices are 60 percent higher than those in Europe. Other studies also point to prices as a major factor in American health care spending growth.
During their year-long effort to repeal the Affordable Care Act in 2017, Republicans turned to free-market mythology to explain away the special pain meted out to American health care “consumers.” House Freedom Caucus chairman Jim Jordan of Ohio argued that Obamacare supporters needed to talk to Adam Smith’s invisible hand:
“The point is we don't have a free market. I think Americans have forgotten what a free market looks like in health care…I do know that every other industry, every other area where you have markets, when you can shop for price and shop for value, prices come down over time. That's what we'd like to see more of in health care.”
But when Jeff Scott of Vox (like Ali Velshi of MSNBC before him) asked Jordan “is there a state or a country with the kind of health care system you're talking about that we should be trying to emulate here?” the Ohio Republican could manage only, “I’ve not seen that.”
Jordan hasn’t seen a successful “free market health care system” because it doesn’t exist. As Dr. Paul Krugman diagnosed the problem with Republicans’ vision in July 2009:
There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn't work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.
The theory explaining the failure of free market health care isn’t rocket science. Let's start with the conservative free-market nirvana where buyer and seller, each armed with perfect information, come together in a voluntary transaction. But from the get-go, the patient-as-consumer faces a knowledge asymmetry almost impossible to overcome. Americans' general deference to physicians isn't just a cultural trait, it simply reflects the expertise and training regarding diagnoses, possible treatments, and likely outcomes doctors possess and their patients do not. For some cases and for some conditions, the layman can narrow that yawning information gap. But WebMD or no, it can't be eliminated. "Health" is not a commodity. Those who believe that choosing a health care product or service is no different than buying a car, television, or cell phone might feel differently after, say, developing colon cancer.
But even if the diagnoses, treatments, and cures for heart disease, diabetes, or depression could be purchased in a free market, in the United States the buyer simply doesn't—or can't—know what price he or she will pay. As Stephen Brill documented in March 2013 ("Bitter Pill: Why Medical Bills Are Killing Us"), hospital prices for drugs, supplies, and procedures are completely opaque. The answer from the so-called "charge master" about what anything costs depends on whether the patient is insured or uninsured (the latter often forced to pay multiple times more than the former) and who the insurer is. As it turns out, that mystery pricing is one of the hallmarks of the American model that spends more than $3 trillion a year (over 17 percent of GDP) on health care, more than Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain, and Australia combined. So whether we're discussing colonoscopies, hip replacements, asthma inhalers, or ER visits, the only certainty is that the cost to Americans will be higher—sometimes orders of magnitude higher—than those faced by the citizens in just about any other major national economy.
American exceptionalism in health care is, as Sarah Kliff summed it up, “that the federal government does not regulate the prices that health-care providers can charge.”
During the 2016 campaign, Bernie Sanders’ Medicare-for-all plan (a single payer government insurance system with fixed payment rates for providers which also eliminates deductibles and co-pays) or Hillary Clinton’s “Obamacare Plus” proposals (which extends the ACA framework in place while targeting high prescription prices and growing out-of-pocket costs with additional tax credits for consumers and tighter regulation of insurers and pharmaceutical firms) each addressed the question of “Who pays?” But as Matthew Yglesias pointed out, neither clearly answered the question of “How much?”
The thing about saving money by having a single health care payer squeeze providers on reimbursement rates is that adopting a single-payer structure is neither necessary nor sufficient to achieve the gains. In other words, if the American political system wanted to cut doctors' payments, we could do that without moving to a single-payer system. Conversely, adopting a single-payer system does not on its own lead to low reimbursement rates -- that's a separate decision that the political system would have to make.
The term for regulating the fees charged by doctors, hospitals, and others in a multi-payer setting is called all-payer rate setting, and it's a pretty good idea.
As Kliff rightly highlighted, "France, Germany, Japan, the Netherlands, and Switzerland all use some version of all-payer rate setting." Even with hundreds or thousands of private insurance plans, since 1980 all five countries have experienced much slower growth in healthcare spending than the United States (see chart above). All-payer rate setting is a powerful reason why:
In all-payer rate setting, all of the insurers negotiate jointly with all of the health care providers, and set on one specific price for each procedure...Single-payer health care systems save money in two ways: reducing administrative costs and increasing the bargaining power of health insurers. This is true of all-payer rate setting systems, too.
And to be sure, that rate-setting extends to prescription drug prices as well. As Kliff, Austin Frakt, and Zeke Emmanuel all detailed during the EpiPen and Daraprim pricing scandals, the UK, Spain, Italy, Germany, the Netherlands, and Australia all use some form of “reference pricing.” These and other nations limit the kind of stratospheric price increases experienced in the United States by evaluating both the cost-effectiveness and efficacy of new drugs in setting prices. As Kliff lamented at the time:
“EpiPen's 400 percent price hike tells us a lot about what's wrong with American health care. Forget the $500 EpiPen. The era of the $1,000 pill is already upon us."
In contrast, the Republican vision for health care is a return to the Hobbesian struggle of each against all in the American health care ecosystem. And that means more pain for consumers, insured and uninsured alike. Or as Vox founder Ezra Klein put it in March:
“American health care can be free market or cheap. It can’t be both.”
Trends already underway in the American health care market will only exacerbate these pressures. For starters, the U.S. population is aging and over the next 25 years, the growth of Medicare will be the largest problem area for the federal budget. Expensive drugs for Hepatitis C and other diseases, new cancer cures, and the development of individual genetic therapies are likely to present growing cost challenges in the future. "We're paying too much for prescription drugs," Ezekiel Emanuel warned last year, noting that cancer drugs like Yervoy, Opdivo, and Keytruda routinely cost more than $120,000 a year, while Kalydeco for cystic fibrosis reaches $300,000 annually. Cerezyme for Gaucher disease runs about $300,000 per year—for life. "Despite representing about 1 percent of prescriptions in 2014," Emanuel notes, "these types of high-cost drugs accounted for some 32 percent of all spending on pharmaceuticals. As the Washington Post reported on January 3, new genetic cures for rare diseases are already projected to cost almost $1 million per patient.
Making matters worse, mergers among insurers and hospitals have increased at the same time that both have been busily acquiring physician practices. All the while, the erosion of employer-provided health insurance, cost-shifting to workers, and the rise of the so-called "Gig Economy"—the very factors that helped fuel the drive for Obamacare in the first place—mean families will still face the growing burden of health care costs themselves.
In the future, the United States simply must spread that burden across the entire health care ecosystem. With health care spending already crowding other social spending in the United States (see chart above), other constituents in the American health care marketplace must share the pain.
Economics, after all, is the study of the allocation of scarce resources. The economics of health care is certainly no exception. Given the competing and often contradictory demands across its ecosystem of patients, employers, physicians, drug stores, pharmaceutical firms, device manufacturers, clinics, hospitals, insurers, and government, the economics of health care might more accurately be described as the allocation of pain. In the face of the infinite “wants” for healthy citizens, financially secure families, well-compensated practitioners, and strong profits for private companies of all stripes, societies must choose how and why to distribute discomfort and dissatisfaction to some or all of the constituents.
Microsoft, Google, Apple, Amazon, J.P. Morgan, and Berkshire Hathaway notwithstanding, new technology, platforms, and systems can drive only a small part in the reduction of health care from its current 18 percent of U.S. GDP to, say, 13 or 14 percent. The inescapable answer from decades of experience around the world since the end of World War II is that, in one form or another, government must set the rates for care. Insurers, hospitals, doctors, pharmaceutical companies, and every other segment of the health care food chain will have to make less. (In exchange for the reduction in their lifetime incomes, American doctors like many of their colleagues in Europe should have their medical education paid for, with a pro-rated system of compensation for those who more recently took on that debt burden.) All-payer rate-setting solves the twin problems of transparent and lower prices. The structure of the insurance system*—whether single-payer, private, or some public/private hybrid—is less critical. To put it another way, who pays is less important than how much. At the end of the day, these are political questions, not algorithmic ones. And the best part is we already know the answers.
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* There is no shortage of proposals to provide universal health care coverage in the United States. Medicare for All, MidLife Medicare, and Medicaid for All are just a few, while the “Medicare X” blueprint from Democratic Sens. Michael Bennet of Colorado and Tim Kaine of Virginia would let individuals and, eventually businesses, buy into a public health insurance option. My own preference would be to combine Medicare with elements of the German and Swiss systems and extend it to all Americans (with the possible exception of the military). Individuals and employers would could obtain 80/20 “Medicare Standard” coverage for the same price through the government or a private insurer. (For patients and providers, this would create a de facto single payer system with all of the administrative savings that enables, even though it would be financed and distributed through multiple sources.) Private insurers could then sell for-profit “Medicare Plus” plans to defray the deductible and out-of-pocket costs of the Standard package, provide coverage for new drugs or genetic treatments, offer coverage of private rooms, and other non-standard options. (Note that House Speaker Paul Ryan has proposed something very similar, but only for those over age 65.) Once in place, the U.S. could switch the financing of its health care system from primarily employer-based to taxpayer-funded. But none of it is affordable for the nation until and unless government rate-setting is in place.