A Radically Moderate View of Healthcare Costs
The US healthcare system will be one of the top issues in the Presidential race and we will hear lots of discussion about Medicare for All and other solutions. We won’t hear much discussion about innovative ways to lower the overall costs of healthcare while also offering universal coverage. The purpose of this post is to discuss some of the underlying issues that cause our healthcare costs to be so high and some ideas on how we can address the cost side of the equation.
As I write this post, I am assuming that there is widespread support for the following goals.
1) Universal coverage (some debate on whether this would apply to undocumented immigrants)
2) Lower costs for the middle-class including taxes, premiums, deductibles and copays.
3) Equal or better healthcare service than is offered with our current model. This includes quality of care and wait-times.
Today, the US spends a little over 17% of GDP on healthcare. Switzerland, which has the second-highest percentage, spends a little over 12%. Developed countries that provide universal coverage are generally spending about 10% of GDP on healthcare. There is no doubt that we are a cost outlier.
There are many reasons that cause the US system to be so expensive.
Administrative Costs: The costs of meeting the demands of dozens of different insurance companies is absurd. It is not uncommon for hospitals to have as many billing specialists as they have hospital beds. Roughly 25% of our healthcare costs are administrative in nature.
Inefficient Market Mechanisms: In order for markets to work, there needs to be easy access to price and quality information, true competition with choices and consumers must be motivated and empowered to find the best value. Try to compare all-in prices and quality information for a knee replacement across multiple providers and you will quickly realize that it is impossible. Most of us feel so unempowered to evaluate quality that we don’t even look at the price.
Drug Costs: We must walk a very fine line with the pharma industry. We want drug companies to invest heavily in new treatments to improve our health. The returns on R&D investments in the pharma industry have fallen dramatically over the past eight years. Gross profit from drugs funds R&D and unless we want the industry to back away from creating new life-saving drugs, we must be very careful about how we tackle the drug price issue.
Drug prices in the US are out of line with other developed countries. They are roughly twice as high in the US versus Canada. Pharma’s largest customer, Medicare, is forbidden from negotiating drug prices. We have seen many instances of pure price gouging but we have not seen any sensible proposals that balance the need for innovation for the future with lower prices today.
Defensive Medicine: Because of widespread litigation, doctors must pay higher malpractice rates and conduct more tests to avoid potential lawsuits. Gallup estimated the total cost of defensive medicine to be $650B in 2010 which means that it is likely close to $800B today.
Pay per Service Business Model Almost all providers in the industry are incented to “sell” more services to patients in order to increase revenues. We accept that and expect that in all other industries but it does not feel right when it comes to people’s health. One notable exception to the Pay per Service Model is Kaiser Permanente. Kaiser’s healthcare premiums are often 20% less than other comparable HMOs (they are a non-profit) with comparable or better patient outcomes. In the Kaiser system, all the providers (doctors, nurses, hospital staff, and technicians) work for Kaiser and are paid a salary. They have no incentive to overprescribe any tests or treatments.
Artificial Restrictions on the Availability of Providers: Doctors play two primary roles. They are either diagnosing issues or treating issues. If they are treating issues, they are either prescribing/applying medicines or they are physically altering the patient (surgery as an example). Why do we require four years of medical school for someone that primarily diagnoses illnesses? If IBM Watson can easily beat the best Jeopardy players, why can’t it be more effective in diagnosing disease than a doctor who struggles to keep up with the latest medical journals? The provider that diagnoses needs to have great people skills and great powers of observation. They don’t have to know the questions to ask let alone the answers. A computer can walk them through the entire diagnosis.
Our system also relies much more heavily on the use of non-surgical specialists than other countries. Historically, it was not possible for one doctor to be current in all specialties and therefore it was important to send patients to specialists to be diagnosed. If we change the paradigm and use people with great people skills augmented with computer diagnosis tied to the latest medical knowledge, we should be able to provide better healthcare to more people and at a lower cost.
Radical Moderate Proposed Solutions
If those are some of the primary reasons that our healthcare costs are so high, what should we do? There are no single magic bullets but the following ideas could move the dial on costs so that we can cover more people without bankrupting the country.
1) Force insurance companies to use a single standard process for claims processing across all companies and all providers.
2) Force providers that want to be Medicare eligible to establish two and only two transparent prices for all services. Public (Medicare/Medicaid/VA) and Private. Providers would establish one price for a service that was paid by all insurance companies and which could be no more than 30% higher than Medicare reimbursement rates.. For providers, it will be all or nothing for the private side. Accept all private insurance or no private insurance. This would eliminate provider networks that result in unexpected costs and difficulties in comparing private insurers.
3) Establish a Public Option for health insurance. Subsidize that option and allow private insurance companies to move really sick people to the public option so that they can hold their rates down.
4) Establish sliding scale co-pays for the Public Option with no deductible. As an example, a family below the poverty line might pay a $25 copay for an emergency room visit while a family with an income over $200,000 might pay $250. The idea is to encourage patients to use discretion on when to seek services while keeping an affordable cost for the patient. Continue to cover preventative care at no charge.
5) Establish sliding scale premiums for the Public Option that are tied to income levels. The premiums could start at near zero for very low-income families and rise to rates comparable to the private insurance market for the wealthy.
6) Using Medicare and the Public Option, pressure the provider market to use diagnostic specialists and computer diagnosis to start replacing medical doctors. If we want to cover more people, we need more providers and this is the time to modernize some of our processes.
7) Provide incentives to pharma companies to license patents for all new drugs after five years. Allow Medicare and the Public Option Service to negotiate drug prices.
8) Provide incentives through the Public Option and Medicare for the formation of new Kaiser like systems where the provider is paid an annual fee per patient rather than a per service fee.
9) Create a public option for malpractice insurance that is subsidized to keep rates lower and lessen the need for defensive medicine.
Once again, there are no magic bullets and if we want to be able to afford comprehensive coverage for everyone, we will need to change the system and lower the costs. All of my suggestions have flaws and challenges. I welcome your feedback. Thank you for reading this post.
Jim Sherriff — The Radical Moderate