Economics, the textbooks say, 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.
But that “why” isn’t so much a question of the “dismal science” as one of national values. And in the United States, virtually alone among major modern economies since World War II, the paramount, if often unstated, value has been an especially narrow notion of “freedom.” Freedom, that is, to choose which if any insurance to offer or purchase. Freedom to charge whatever prices the “market”—and insurers—will bear for doctors’ visits, tests, procedures, surgeries, prescription drugs, hospital stays, and even insurance itself. But by 2010—with 50 million uninsured, 25 million underinsured, 60 percent of bankruptcies due to medical costs, one in five people deferring needed care, and thousands without coverage needlessly dying every year—Americans had learned that freedom of choice often only meant the freedom to go without. To put it another way, the U.S. health care system had long allocated most of the pain to its consumers.
With President Obama’s signature on the Patient Protection and Affordable Care Act on March 23, 2010, the United States began to elevate another objective for its health care system: Near-universal coverage. And by and large, the ACA has worked as designed, enabling as many people as possible to obtain health care at a “reasonable” cost to themselves and the government. (Some 12.7 million taxpayers were exempted from Obamacare’s individual mandate in 2016, while another 6.5 million paid $3 billion in penalties for not obtaining insurance coverage.) With 25 million newly covered, America’s uninsured rate has dropped to a historic low as family finances and income inequality have improved.
Nevertheless, Republicans, who have never accepted universal coverage as the objective for American health care reform, are continuing in their perpetual quest to “repeal and replace” Obamacare. Democrats, concerned about rising premiums, high deductibles, and limited choice of insurers in some regions are offering proposals to “improve and extend” the ACA. But if the “why” of reform is to ensure health care for every citizen and legal resident of the United States, there’s no great mystery as to how to achieve it. Decades of global experience and recent American history provide three inescapable lessons to show the way.
1. The federal government must set the rates
When Speaker Paul Ryan pulled his American Health Care Act from House consideration two weeks ago, his retreat reflected the staggering unpopularity of his bill. Only 17 percent of Americans polled supported the bill. It’s no wonder why: The nonpartisan Congressional Budget Office (CBO) forecast 24 million would lose insurance coverage, with older and lower income people getting slammed by higher premiums, deductibles, and out-of-pocket costs as increasingly inadequate tax credits force the older and sicker out of the market altogether. Ryan brushed off that horrible math, declaring, “We always know you're never going to win a coverage beauty contest when it's free market versus government mandates.” Despite opposing Ryan’s bill for not being cruel enough, House Freedom Caucus chairman Jim Jordan made a similar argument against Obamacare:
“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? Not setting prices.
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 Matthew Yglesias suggests, all-payer rate setting is “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 health care 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.”
2. Basic insurance plan must have broad protections to spread risks and lower costs
One reason for the Republicans’ choice to allocate more pain to patients is because they don’t believe the term “insurance” means what it does. “The whole idea of Obamacare,” Speaker Ryan complained last month, is that “the people who are healthy pay for the people who are sick.”
The fatal conceit of Obamacare is that we’re just gonna make everybody buy our health insurance at the federal-government level, young and healthy people are going to go into the market and pay for the older, sicker people. So, the young healthy person is going to be made to buy health care, and they’re going to pay for the person, you know, gets breast cancer in her 40s or who gets heart disease in his 50s.
Of course, spreading risk across the largest possible population in order to lower costs is the very definition of insurance. The very idea of high-risk pools is to force those unlucky enough to be or become sick to pay more for insurance, an approach already shown to be prohibitively expensive for policyholders and the states trying to subsidize them alike. Meanwhile, gutting consumer protections against the most predatory practices of the insurance industry, including discrimination against those with pre-existing conditions, “rescission” to drop policyholders when they get sick, and annual and lifetime benefit caps all allow the carriers to cherry-pick the healthiest subscribers. And rolling back Obamacare’s package of 12 essential health benefits (EHB’s), including prescription drug coverage, hospitalization, out-patient treatment, mental health care, pregnancy, maternity care, and much more not only set a baseline for insurance offerings under Obamacare, but also help distribute the risk for insurers across a much larger pool of subscribers. Without a comprehensive set of EHB’s, basic insurance coverage becomes virtually useless. The CBO certainly thinks so, warning in December that the congressional budget scorekeeper “would not count those people with limited health benefits as having coverage.”
Nevertheless, even after their humiliation two weeks ago, the Trump White House and Republican leaders are still trying to resurrect their dead-on-arrival AHCA. As The Hill reported on Wednesday:
According to Freedom Caucus members, the latest proposed changes would give states the option of eliminating the essential health benefits that insurers are required to cover; the community rating, which prevents insurers from charging sick people higher premiums; and "guaranteed issue," which deals with those with pre-existing conditions.
As Larry Leavitt of the Kaiser Family Foundation warned, “With no benefit requirements, insurance policies could get quite skimpy.” Could and did. A 2011 report by the Department of Health and Human Services found that before the ACA took full effect “62 percent of individual market plans did not cover maternity care, 34 percent did not cover substance abuse services, 18 percent did not cover mental health coverage and 9 percent did not cover prescription drugs.”
But the GOP wouldn’t just take Americans back to the future. Congressional Republicans would be ignoring the global experience that keeping insurance costs lower for everyone means ensuring that a basic plan provides comprehensive coverage.
In his 2009 book The Healing of America and companion PBS Frontline documentary Sick Around the World, T.R. Reid examined the different approaches used by the UK, Germany, Japan, Taiwan, and Switzerland to deliver universal health care. But while the UK's National Health Service (NHS) is a single payer system in which hospitals are run by the government and doctors are employees of it, the other nations feature private insurers, hospitals, and physicians just like the United States but with two big exceptions. One, as detailed above, is rate-setting. The other is that the government-mandated insurance itself, even in countries where private companies sell both basic and supplemental plans, is very robust.
Sick Around the World describes the four basic models including the "out of pocket" approach, the completely government-run system implemented in the UK, the Bismarckian social insurance strategies in Germany and Japan, and the single-payer system in Canada that’s emulated by South Korea and Taiwan:
Reid reports next from Japan, which boasts the second largest economy and the best health statistics in the world. The Japanese go to the doctor three times as often as Americans, have more than twice as many MRI scans, use more drugs, and spend more days in the hospital. Yet Japan spends about half as much on health care per capita as the United States.
One secret to Japan's success? By law, everyone must buy health insurance—either through an employer or a community plan—and, unlike in the U.S., insurers can neither turn down a patient for a pre-existing illness, nor are they allowed to make a profit.
Reid's journey then takes him to Germany, the country that invented the concept of a national health care system. For its 80 million people, Germany offers universal health care, including medical, dental, mental health, homeopathy and spa treatment. Professor Karl Lauterbach, a member of the German parliament, describes it as "a system where the rich pay for the poor and where the ill are covered by the healthy." As they do in Japan, medical providers must charge standard prices. This keeps costs down, but it also means physicians in Germany earn between half and two-thirds as much as their U.S. counterparts.
Given the admiration it enjoys from conservatives like Megan McArdle and Avik Roy, Switzerland provides an especially helpful case study for evaluating the U.S. health care system. Unlike France and Japan where the central government regularly negotiates prices and fees directly with providers, Reid explains:
The Swiss system is social insurance like in Japan and Germany, voted in by a national referendum in 1994. Switzerland didn't have far to go to achieve universal coverage; 95 percent of the population already had voluntary insurance when the law was passed. All citizens are required to have coverage; those not covered were automatically assigned to a company. The government provides assistance to those who can't afford the premiums.
How does it work? The Swiss example shows that universal coverage is possible, even in a highly capitalist nation with powerful insurance and pharmaceutical industries. Insurance companies are not allowed to make a profit on basic care and are prohibited from cherry-picking only young and healthy applicants. They can make money on supplemental insurance, however. As in Germany, the insurers negotiate with providers to set standard prices for services, but drug prices are set by the government.
Regardless, the American health system is unique in the world:
These four models should be fairly easy for Americans to understand because we have elements of all of them in our fragmented national health care apparatus. When it comes to treating veterans, we're Britain or Cuba. For Americans over the age of 65 on Medicare, we're Canada. For working Americans who get insurance on the job, we're Germany.
For the 15 percent of the population who have no health insurance, the United States is Cambodia or Burkina Faso or rural India, with access to a doctor available if you can pay the bill out-of-pocket at the time of treatment or if you're sick enough to be admitted to the emergency ward at the public hospital.
The United States is unlike every other country because it maintains so many separate systems for separate classes of people. All the other countries have settled on one model for everybody. This is much simpler than the U.S. system; it's fairer and cheaper, too.
3. States cannot achieve universal coverage on their own
When it comes to making health care cheaper, Republicans have looked to the states. The House Freedom Caucus wants states to decide which essential health benefits insurers must provide. The so-called compromise bill offered by Sens. Bill Cassidy of Louisiana and Susan Collins of Maine proposes that “states can choose between the existing A.C.A. marketplace structure (at 95 percent of current funding) and an alternative structure, centered on government-funded health savings accounts, to be used in a deregulated market where catastrophic plans feature prominently.” As for Paul Ryan, he has long wanted to roll back Medicaid spending and hand over the smaller pool of money still left as “block grants” to the states. As he recently confessed to Rich Lowry of the National Review, Ryan even dreams about being able to “de-federalize and entitlement”:
So, Medicaid—sending it back to the states, capping its growth rate. We’ve been dreaming of this since you and I were drinking out of a keg.
But these proposals aren’t about “innovation” or giving “states the flexibility to tailor their Medicaid programs to most efficiently and effectively serve low-income families in their communities,” as current HHS Secretary Tom Price put it in 2015. As the AHCA’s forecasted shedding of 24 million insured Americans—14 million of them on Medicaid—showed, the GOP’s is a scam to deny people health care altogether. As the record of the past 25 years shows, when Republican-controlled states have the option to expand Medicaid, they won’t. And when Democratic-led states try to provide universal health care to their residents, they can’t.
The history of the Medicaid program now serving 73 million lower-income, disabled, and elderly Americans is clear on this point. Before the passage of Obamacare, Uncle Sam on average provided 57 percent of the funding for the joint federal-state program. (Poorer states like Alabama and Mississippi received 75 percent of the funding from Washington, DC.) As I noted after the Supreme Court decided the issue of Medicaid expansion under Obamacare:
Medicaid not only pays for a third of nursing home care in the United States; it covers a third of all childbirths. (In Texas, the figure is one-half.) As with Medicare, Medicaid provides insurance for substantially less than private insurers (27% less for children, 20% for adults).
But the Roberts Court ruled in June 2012 that the Obama administration could not “coerce” states into Medicaid expansion, and many of the worst-off said no to Uncle Sam. That included the state with the worst health care system in the nation, Mississippi. As Washington Post fact checker Glenn Kessler explained as former Gov. Haley Barbour complained that “we have people pull up at the pharmacy window in a BMW and say they can't afford their co-payment,” Mississippi’s Medicaid program was already among the most draconian in the nation:
Mississippi provides some of the lowest Medicaid benefits to working adults in the nation. A parent who isn't working can qualify only if annual family income is less than 24 percent of the poverty line. Working parents qualify only if they make no more than 44 percent of the federal poverty level. Seniors and people with disabilities are eligible with income at 80 percent of the poverty line...
Translated from the federal poverty guidelines, that means a working Mississippi couple with one child could earn no more than $8,150 a year and still qualify for Medicaid, seniors and people with disabilities could earn no more than $8,700, and a pregnant woman could earn no more than $20,000 a year.
If Medicaid is block-granted to the states, many will slash benefits and eligibility.
As Jonathan Cohn helped explained in the New Republic six years ago, what block grants do best is to help the states take an ax to their insurance rolls:
That's not to say plenty of governors wouldn't take advantage of block grant status to change their Medicaid programs in ways they cannot now. They surely would--by capping enrollment, thinning benefits, increasing co-payments, and so on.
But if “states’ rights” means the right to say no to providing health care, even those with the best of intentions can’t make it work for everyone. As New York and California consider their own universal coverage plans in response to GOP sabotage of Obamacare, it’s worth recalling that Bernie Sanders’ home state of Vermont had to abandon its ambitious single-payer effort in 2014. Romneycare in wealthy Massachusetts was only possible because of increased Medicaid funding in addition to the commonwealth’s unique $1 billion fund to compensate hospitals for the care of the uninsured. And as Ezra Klein documented in July 2007 (“Over Stated: Why the ‘Laboratories of Democracy’ Can't Achieve Universal Health Care”), ”Massachusetts may be the exception that proves the rule.”
Looking at the tough times that befell universal coverage efforts in Washington, Oregon, Tennessee, and Hawaii dating back to the early 1990’s, Klein concluded that medical inflation, recessions, mandatory balanced budget requirements, and shifting partisan winds were too much for states to overcome:
But letting states continue to take the lead would be disastrous, for one very simple reason: providing health care for all citizens is one of those tasks, like national defense, that the states are simply unequipped to manage on their own. The history of state health reform initiatives (and there’s quite a history) is a tale of false hopes and great disappointments. The deck is stacked from the start, and the house—in this case the insurers, the providers, and other agents of the status quo—always wins. The new raft of reforms may prove different, but they probably won’t. Universal care advocates must be realistic about that, and think hard about how to convert the energy in the states into a national solution before the current crop of novel experiments fail—because fail they almost certainly will.
The current appetite for universal health care in state capitals may seem thrilling and unprecedented to some, but to those who follow the issue it carries an unsettling charge of déjà vu. Over the years, states have tried programs of many different ideological and economic persuasions. All of them failed, and not because the programs were insufficiently inventive, but because states are structurally incapable of sustaining them.
It is true that Canada has provided universal coverage to its 36 million residents through a single-payer program managed by the provinces. But as Danielle Martin and Sandro Gallea recently explained, the Canadian system hasn’t merely enshrined health care as a public good for all.
Second, the feature that has likely been at the core of the Canadian health care system’s success is a federal requirement to provide insurance to cover all necessary doctor and hospital services, which has been part of the plan since its inception. Although actually providing health care is decentralized to 13 provinces and territories, each of these regions is required to provide free point-of-care treatment to all citizens through one central payer that guarantees coverage for an agreed-upon package of essential services.
The health care plan for each province and territory is shaped from that core guarantee of universal public coverage, bound together by national legislation. That has buffered Canadian health care from multiple challenges.
“The federal government supports the public programs through fiscal transfers conditional on their meeting the five criteria of the Canada Health Act,” the Commonwealth Fund explained, adding that “around two-thirds of Canadians also have private health insurance, which covers services that are not covered under the public programs.”
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While President Trump and House Republicans seem determined to push on with their dismantling of Obamacare, Democrats and their allies have been offering improvements to the Affordable Care Act for months. In August, President Obama himself took to the pages of the Journal of the American Medical Association to do just that in an article titled, “United States Health Care Reform: Progress and Next Steps.” While Sarah Kliff and Ezra Klein summed up “The Lessons of Obamacare” three weeks ago, Paul Krugman offered “How to Build on Obamacare.” Charles Gaba, the guru of ACASignups, has developed a detailed list of proposals covering topics from a public option, fully-financed risk corridors and larger subsidies to greater eligibility for cost-sharing reductions, expanded Medicaid, and more. All address the three biggest near-term challenges of the ACA: getting more young, healthy Americans to enroll, improving insurance choices in the (mostly rural) counties now served by only one exchange provider and lowering deductibles and out-pocket costs for working families.
But while most of the discussion from Democratic circles has focused on mending, not ending, Obamacare, the growing backlash against the Republican campaign to demolish the ACA is renewing interest in a single-payer solution. In January, the Pew Research Center found that 60 percent of those surveyed, including 32 percent of Republicans, now believe “the government should be responsible for ensuring health care coverage for all Americans.” (Gallup reported a more modest 52 percent in favor of the idea.) Vox recently found that even half of the participants in a focus group of Trump voters supported the idea of single-payer health care. (As for just what people mean by “single-payer,” Philip Bump pointed out that “It’s complicated.”) That changing landscape helps explain why Bernie Sanders has promised to introduce a "Medicare-for-all" bill in Congress "within a month."
"If every major country on earth guarantees health care to all people and costs a fraction per capita of what we spend, don't tell me that in the United States of America, we cannot do that."
We can do that, but we’ve got to save Obamacare first. That means preserving, protecting, and promoting the ACA now. But eventually—inevitably—the United States must decide once and for all it will allocate its scarce resources based on the simple principle that all Americans deserve health care.
When we do, we must act on the three lessons of universal health care everywhere. And the federal government must set the prices for all care with a package of comprehensive coverage for everyone, regardless of the state in which they live.
