Trickle-Down Health Care: How We Could Actually Fix The US Health System
…and save everyone money
Preamble: This is an attempt to explain what’s gone awry with American health care— and a way to fix it—in human terms. It is meant to be a non-partisan discussion, so please keep that in mind when commenting. The views laid out here are my own and do not represent those of any organization.
It’s Saturday morning, and you’re shopping for a raygun. How did you get here? I’ll explain.
It’s the future, and the world has been invaded by aliens. The good news is the aliens are tiny and have no interest in taking over, or even eating people. The bad news is they really love to eat houses. That’s because the aliens are extraterrestrial termites.
They’re everywhere. You never know when you’re going to have to patch a hole in your porch, or discover that your nightstand has been half-eaten. Wood, brick, concrete, steel—if it’s part of a house, they’ll chew it up.
That’s why you’re at RayGun World this morning. Early on, people simply chopped off the alien-infested parts of their houses. But eventually scientists invented raygun technology. Their special beams zap the various breeds of alien termites back to their home planet, and simultaneously repair any chewed-up parts of your house.
You have decided to lease a raygun for yourself after witnessing your neighbor’s house collapse entirely because — unbeknownst to him — the alien termites had been chewing on the basement for years.
The RayGun World saleswoman greets you with a wide smile as you walk in. The first thing she asks you is if you have Extraterrestrial Termite Insurance?
You tell her that you have standard E.T. coverage, through your job.
“Wonderful!” she exclaims. “If you didn’t, you’d have to pay full price. Come with me, and I’ll show you the rayguns available in your country.”
You walk down the aisle past a whole bunch of sleek, shiny rayguns. Each is labeled with its corresponding country where it can be used. You pass the sophisticated, regal-looking U.K. ray guns ($4,003 per year), which looks like a termite-killing Rolls Royce.
Next to it sits the gleaming Swedish rayguns ($5,228), which look like rocketships. Germany’s raygun ($5,267) is equally inspiring, as is Japan’s ($4,150). Your gaze lingers on a row of Nicaraguan rayguns ($1,000), which look like converted cowboy revolvers, and the saleswoman makes a face that you interpret as, “Who would ever use one of those, right?”
Finally, you reach the wall with U.S. rayguns. They’re… well. You’re not impressed. It looks like a dirty toy: small, dull, and a little used. There’s no price tag.
The saleswoman begins assuring you that this raygun is 80% as good as any of the fancy European or Japanese ones—but you interrupt her. “American rayguns are supposed to be the best in the world! What’s with this one?”
“Well, America does make the world’s best raygun, in my opinion,” she motions to a glass case behind the counter containing a raygun that makes the other ones look like super soakers. It has a price tag of $30,000. “But standard ET Insurance is not going to cover the cost.”
You grimace. “How much is the regular one?”
She smiles. “With ET Insurance, you only have to pay $50.”
Wow, you think. That’s practically free. Who cares about Europe and Japan! Fifty dollars to fight the termites? “Sure,” you hear yourself telling her.
“I’ll take it.”
Pleased, she excuses herself to go run your credit card.
While she’s gone, you pull out your phone to look up the actual cost of the raygun you just bought. Just out of curiosity.
To your surprise, it costs $9,900.
The saleswoman returns with your receipt, and you’re upset. “Why didn’t you tell me,” you demand, “that this lame raygun costs twice as much as the others?!”
She smiles while raising her hands like it’s a stick-up. “I don’t set the prices—this is just how much the standard American raygun costs,” she says. “If you didn’t have E.T. Insurance already, it would cost you ten grand yes. But that just shows how great of a deal you are getting!”
You’re annoyed. “A great deal would be twice as good of a raygun,” you mumble as you take your receipt. Maybe blasting some termites will make you feel better.
On the way home, you run your hand across the smooth curves of your ray gun and smile. No matter what, you’re glad to have it.
But then, to your dismay, another thought hits you:
How much am I paying for insurance?
At this point I have to tell you something. This isn’t actually a story about aliens and rayguns. It’s really about health care.
Like our fictitious war against termites, health care is a war on sickness. We of course hope that our bodies don’t get invaded by disease or break down. But when they do, we fight and repair, fight and repair.
But despite our country having developed many of the world’s greatest advances in medicine and medical education, the average American’s annual health care is twice as expensive and significantly less effective as our developed-world neighbors.
When you add up all its bits — doctor and hospital visits, medical supplies, drugs, insurance — the average American’s health costs almost $10,000 every year. Yet we live shorter, survive diseases at lower rates, and often can’t afford to go to the doctor when we’re sick. A lot of Americans go bankrupt from health bills. Even if we have insurance.
This defies logic and economics.
The problem is not the people working in our health care system. We have amazing doctors, scientists, nurses, risk managers, etc.
The problem is the design of the system itself.
As I type, the politicians in D.C. are digging in for a trench war over the Affordable Care Act (aka the ACA, aka Obamacare), the law passed in 2010 which sought to make parts of the health system better. Essentially, a tune-up on our ugly raygun.
Republicans are bent on getting rid of the Act. They say it was the wrong kind of tune-up, and it’s resulted in everyone raising their prices. Democrats argue that undoing the tune-up will make things even more expensive. Congress’s most recent study says millions of people will be stuck without health care at all if we reverse course. Everyone — including Mr. Obama — agrees we need to change something.
Some of the politicians involved seem to really care about finding a way for Americans to access affordable health care. But truthfully, much of the debate feels like it’s about winning, not fixing the system. Like when two high school boys get into a fight allegedly over a game, but they’re actually just trying to prove who’s bigger. (Case in point: nobody who’s arguing has proposed a better plan yet.)
But what if the real problem — the lame raygun problem — were something we can actually fix?
What if I said we could make the cost of health care go down for everyone (rich and poor), make the quality go up, and make the whole system easier to navigate?
In this post, we’re going to explore how we could actually do that. To do it, we can’t just alter our existing raygun. We’ve got to redesign it from “first principles.” In the words of (real-life space explorer) Elon Musk, that means boiling things down to fundamental truths, and then reasoning up from there.
Once we lay out the fundamentals of health care, we’re going to model out a better system with the aim of saving money and improving health.
We’re using the raygun analogy for a reason other than because I’m a nerd. How the military works, fights, and innovates is quite analogous to our war on sickness. We’re going to turn to the military for cues on how we can build this new system.
We’re going to go through this in four parts:
I. Why US health care economics aren’t working
II. What health actually costs
III. How to fix the system using Trickle-Down Health Care
IV. How we’d implement it, and what would happen
One last note before we start: What we’re talking about here is the economic argument for fixing health care. (Yay, saving money!) But I must disclose that I believe that making the health care system better is also the right thing to do for humanity. That’s my personal opinion.
The good news is whether or not you agree with that doesn’t change the fact that a new system like the one we’ll walk through will be less expensive and more productive than the one we have. Once we get to the bottom of all this, Utilitarians and Kants should both pretty much agree on this front.
I. Why US health care economics aren’t working
When you arrive home from Ray-Gun World, you’re in for a surprise. Your front door is lying on the floor, broken in half. While you were gone, termites ate the hinges off.
You pull out your new raygun to blast the termites that are still chewing on it. But when you pull the trigger, nothing happens.
On the side of the raygun blinks a message: “Out of Juice.” Wouldn’t you know it?
Luckily, there are Raygun Juice refill stations inside of every Walgreens in America. You drive to the nearest one to buy a tank. At the checkout counter, you ask how much it costs.
“Don’t worry,” the clerk tells you. “Your ET Insurance covers everything but a $10 co-pay.”
Once again, you’re relieved. But now you’re even more curious. After checking out, you do some quick detective work on your phone. You learn that a tank of Raygun Juice costs about $100.
That’s higher than you expected, so you dig more. It turns out that Raygun Juice itself costs only $20 per tank. But the companies charge $100. Few people seem to be angry about this, because most people just have ET Insurance pay for it. They only have to think about that $10 co-pay.
In fact, you read, most stores won’t even tell customers the real price.
Even crazier, Raygun Juice companies charge people without ET Insurance different prices than they charge the insurance companies.
Whatever, though. It’s time to go home and blast some termites.
As they warp away, and their slimy alien chew marks start to disappear on your door hinges, you realize you still have a problem. The broken door won’t respond to the raygun.
That’s because the door broke because it fell, not because of termite saliva. The raygun won’t repair it. Turns out you’re going to need to hire a carpenter to fix it.
Your ET Insurance will pay for termite-adjacent damage like this, your insurance manual tells you. But you are going to have to pay $5,000 out of your pocket first.
Now things are starting to smell fishy.
Literally. Your overheated raygun is emitting a weird fish smell now.
But also, it stinks metaphorically. You’re about to finally ask the question you’ve been dreading.
To your relief, your bank statement tells you that your job takes just $1,800 a year out of your paycheck for ET Insurance. Wow, you think. Insurance companies must be some sort of charity!
Except no. That doesn’t make sense. You saw in the newspaper that the CEO of your ET Insurance company got paid millions of dollars last year. You have a hunch that there are more layers to this.
With 5% cell battery left, you call your company’s HR person. She’s surprised to hear from you on a Saturday.
“How much does the company contribute to my ET Insurance every year?” you ask.
“Well you only have to pay $1,800 a year,” she says. “We pay the other $8,000 or so.”
Finally, the math makes sense. You’re not happy about it, though you are glad to not be one of the millions of people whose jobs don’t cover ET Insurance.
Because of your job, you are now personally paying about as much—door and all—as you would if you were in Germany or England or Sweden or Japan. (Little do you know, if you’d gotten one of those other country’s rayguns, broken doors and all other repairs come free with the raygun.)
Of course, now you’re worried about how much you’ll be spending if the termites break anything else. And you can’t help thinking about how your job could be paying you $8,000 more if you didn’t have to worry about termites…
There’s one big, main reason health care is so expensive in America:
The people (patients) getting the actual product (health care) are layers removed from its actual cost.
If you have health insurance through your job, you’re two layers away from the actual cost of your health care whenever you go to the doctor, hospital, or pharmacy. Between you and the price tag is 1) an insurance company; and 2) your employer.
It feels like you’re paying a few bucks for your raygun, and almost nothing for Juice. But you’re actually paying $10,000 a year. And that’s if you don’t get seriously hurt or sick and need extra care.
If you don’t have a job, or your employer doesn’t pitch in for health benefits, you’re closer to feeling the real cost. But even then, when you show up to the hospital with a broken arm, you usually end up paying a fraction of the bill right there. You’re still at arm’s length. (Your other arm, the good one.)
And you’ll likely not know when your hospital charges $38,000 to treat your stomach problem that the hospital next door only charges $8,000 for.
As “customers” of health care, we are out of the loop on real prices.
When you go to the doctor, your insurance pays most of the bill. When you pick up drugs at the pharmacy, your insurance pays for them. Because we aren’t paying the actual amount for the actual health service we are getting when we get it, the system is inefficient. This means drugmakers can charge your insurance an arm and a leg if they want to, and your insurance can adapt by simply charging you two arms and a leg. (Notably, the parties in the system least likely to overcharge are the employees themselves — doctors and nurses and such. In fact, they’re often underpaid, and almost always overworked.)
Ultimately we, the people getting health care, do pay for it. But we don’t know enough about what we’re actually paying in order for the free market to work in our favor. We, as the customer, have very little ability to price shop or negotiate.
The inefficiency in the system can be boiled down to simple math. Take how much the health insurance industry charges people per year — $550 billion — and subtract how much it pays out to cover its customers’ health expenses: $290 billion.
That’s $260 billion a year that Americans pay for health that doesn’t actually go to health care.
It sounds like a scam when you put it this way. But it’s not some sort of evil plot. Health insurance companies have a fiduciary duty to their employees and shareholders to make a profit. They are just doing their job. And the reason we agree to pay them is rational: We pay them so we can avoid risk.
This, however, has led to the creation of the real thing between us and the actual cost of our health.
Health insurance plans are like communal craps tables. Everyone puts money on the table every year and waits for the dice. Half of us don’t get sick, and we lose our money. (But hooray, we’re not sick!) Another 45% of us get sick enough to almost break even, and our money goes to the hospital (and we get better!). And the remaining 5% of us get way more sick than our money can cover, but luckily everyone else’s money pays for us. Everyone leaves the table empty-handed, having covered their medical bills. And the house collects the leftovers.
There are always leftovers.
The reason most of us are willing to play the game is you never know when you will be in that 5%. You don’t want to be stuck with a $200,000 bill. You’d go broke. So you’re willing to pay extra. But you wish it didn’t cost so much. And little did you know, it doesn’t need to.
I’d like to step back right now and note that this is how all insurance works. We pool money so we can share risk together. But the casino analogy is almost too playful, because the consequences of not playing can be catastrophic. In many fields, insurance is mandatory — and rightly so. It’s illegal to drive without insurance, for example. And no sane bank will give you a loan without homeowner’s insurance. If you don’t have insurance and you crash your car, you risk negatively impacting someone and taking away their freedom (e.g. if you can’t pay to fix the other guy’s car). It’s almost crazy that health insurance wasn’t mandatory in the US until the ACA, because not only can getting sick bankrupt you, but unhealthy people burden the whole system (clogging up hospitals, bringing down the GDP). If everyone went to the doctor when they first got sick, or they could afford to fix chronic health problems and go back to work, the whole country would benefit.
The current American health insurance system is basically socialism, but with capitalists scraping money off the top. By now as we can see, it’s an inefficient system that’s worse than both. Between the house’s fee and the fact that everyone the casino pays to help us get better can overcharge the casino without us knowing, we put more on the table than the players at every other developed country.
The most obvious problem with the economics of American health care is the system obscures costs and favors the casino, not the doctors or patients. To solve it, we need to flip that equation. Before we do that, we should discuss what health care really costs.
II. What health actually costs
The whole alien termite thing was getting way out of hand.
The day after you leased your raygun and paid the carpenter to fix your door, disaster struck again. Your other neighbor’s house collapsed right onto yours.
He had known that he had termite problems, but he couldn’t afford ET Insurance. Because daily raygun rentals were wicked expensive, he pretty much avoided dealing with the termites until he really had to. You’d seen pictures of what his house used to look like back in the day. Pretty nice.
Now he’s homeless, and you have termites in the ceiling.
You haven’t had time to deal with them, because your job is taking up extra time these days. Many of your coworkers have been staying home dealing with their even worse termite problems, and you’ve had to pick up the slack. Your company isn’t going to hit its revenue targets again this year, which means you’ll get a smaller bonus. Too bad.
On your way home from work, you always get a little depressed as you pass Old Man Steve who used to live uptown before the termites ate his house and he went broke. Today, you notice something even more sad. His walking cane is riddled with termites.
You’d stop and use your raygun to help him, but you already know that rayguns only work for the people who paid for them. What a shame, you lament. I haven’t even been using mine that much.
Up on the hill there are some mansions that have those big $30,000 rayguns and private raygun security guards, but besides them, most of the town is in some state of termite trouble. And even the mansion owners aren’t very happy. As the town gets more rundown, and people spend more time and money dealing with the termites, the mansion owners are losing out on potential income in their businesses and in their trading jobs. The problem was even spilling over from other towns — and into other states.
At this point everyone was starting to regret not investing in better rayguns for everyone in the town — shoot, the country. People were starting to ask: How much would it really cost to get this whole termite thing under control?
As you walk up to your house at the end of the day, you notice that the local Army recruits are doing a training exercise down the street.
A thought strikes you. What if we could fight the termites like we fight terrorists?
To understand how to design a better system and more effectively fight the war on sickness, we first need to understand what it fundamentally takes to keep people healthy.
At its simplest, health is about the following:
- Diagnosing health problems
(With tests, screenings, and doctor judgment)
- Treating health problems
(With advice, drugs, surgery, and therapy)
- Handling emergencies
(Including having places people can go to or call up when there is an emergency)
- Long-term care of people who can’t take care of themselves
(Hospital stays, hospice care, and nursing homes)
And then there’s one we often overlook:
- Preventing health problems in the first place
(This is going to be one of the keys to Trickle-Down Health Care. We’ll get back to it later.)
These are the actual things that make people healthy. Now, there are other costs in our current health care system because of the way it’s evolved that seem necessary today, but they aren’t part of the fundamental first principles. (Among these are waiting rooms, advertising the different casinos, and lobbying by companies to protect/maximize profits.)
Let’s ignore the unnecessaries and build out the costs of delivering health itself:
Diagnosing & Treating Health Problems: Non-Emergencies
The average American goes to the doctor three times a year to get diagnosed and/or treated for a problem, according to CDC. The average doctor’s visit lasts between 22 and 25 minutes, and two out of those three results in a drug prescription.
But that average is skewed by sick people.
According to the US Department of Health and Human Services, the healthiest 50% of Americans in a given year account for a mere 3% of the country’s health expenditures. The most unhealthy 5% of Americans account for about half of the spending.
The problem, like we alluded to earlier, is that healthy people don’t know in a given year whether they’ll suddenly get really sick and need a lot of doctor visits — or worse. That’s why we buy insurance.
Because the CDC has helpfully counted up all the doctor visits and given us averages, it’s easy for us to calculate the actual cost of America going to the doctor without having to do the math on every type of visit.
At a fundamental level, to make a diagnosis and prescribe treatment for a health problem, we need a doctor’s time, her staff’s time (if necessary), sometimes some supplies (like those awful popsicle sticks they put down your throat), and sometimes lab work like a Strep culture or blood test.
Notice that a doctor’s office is not on that list. An office is one of those things we think the health system needs, but it’s not a fundamental. Doctors used to go to you, after all. There are apps now that let you FaceTime a doctor instead of going in person, which may dramatically decrease the cost of delivering health care in the future. But we’ll assume for our calculations that the average visit requires an office for now, and be pleasantly surprised when the future literally cuts the cost of a diagnosis in half.
Keep in mind, though, that we are just talking about costs. Not profits. Not the actual bill you get in the mail. Just what it takes fundamentally for a doctor to diagnose and treat.
Cost of the average doctor visit:
- 30 min of the doctor’s time to examine and advice (The average doctor makes between $160k and $300k a year, so if we said all the doctors made $300k, working 8 hour days 5 days a week, to be generous and because it makes our calculation simple): $75
- 30 min of the doctor’s assistant/staff time (we’ll assume people do their own scheduling and paperwork electronically through systems like Zocdoc, but a staff member is there the whole time while you are there, assisting the doctor or helping with office things, and we’ll pretend that staff member makes a generous $140k for easy math): $35
- Petty supplies like those popsicle sticks: $5
- Lab work for tests (we’ll pretend that every visit results in a test of some sort): $35
- Overhead costs for doctor’s office (we’ll assume 1,500 square feet per doctor, a budget of $50/sqft all-in for the lease+fixtures+reception, amortized across 16 patients a day, only open on weekdays): $150
Cost per doctor’s visit: $300
Total cost of 3 doctor visits each for all 320 million Americans: $288 billion
Note 1: I’m not a healthcare economist, so I might be missing something. If you are a healthcare economist, please chime in here. (But see below first.)
Note 2: Our overhead cost is actually 1/3 higher than the standard overhead for a 1 doctor, 2 nurse office described here. That’s on purpose.
Note 3: We’re factoring in several things into our overhead calculation: Typically, an additional doctor after the first adds only 1,000–1,200 more square feet of space to the facility. But we’re going to keep the calculation at 1,500 for simplicity’s sake and call the padding “administrative costs.” There’s also capital costs like microscopes and computers at every doctor’s office but they’ll get amortized across so many patients that we’ll just include them in this padding. One more thing that gets bandied around in health care cost discussions is “malpractice insurance.” Basically, doctors get liability insurance to cover them if they get sued. It costs an average of $20,000 a year per doctor, and if you amortize that out across 16 patients a weekday, that’s $5 per patient. We’ll assume that’s included in the overhead, too.
Note 4: In a moment, we’re going to discuss the costs of hospitals, in which the costs of big capital equipment like MRI machines are included. We’ll also discuss CT scanners and other screening equipment in the Prevention section. So we’re leaving that big stuff off of the standard doctor cost list.
Drugs (what you get from the doctor!)
All the annual figures I found for sales of drugs combine doctor prescriptions, hospital meds, and over the counter drugs all together, so we’ll just give them one line in our big math equation.
(Note: Many non-generic drugs are much more expensive than they cost to make, and more expensive in America than abroad. They’re like that $20 Raygun Juice we pay a $10 co-pay for and our insurance pays $100 for. There are lots of reasons for this and things we can potentially do about it, but we’ll leave most of that for another discussion.)
Emergency room visits & hospital stays
The costs of hospitals are a beast to estimate, because they have a lot more equipment and building costs than a doctor’s office. But we do know how many people go to the hospital every year and what happens to them.
Americans collectively make 125.7 million hospital visits every year. Seven percent of those end up being overnight stays. It’s pretty difficult to parse out the fundamental costs of delivering hospital care (including in-patient and out-patient surveys), so for our calculation we’ll start with the total amount US hospitals bill patients per year for hospital stuff: $762 billion.
One place where we know we can save on hospital costs is something called the “facility fee.” This is a cost the hospital charges just for walking in the door, whether you’re getting your hand sown back on or you’re just getting a Band-Aid. The fee can range from $15 to $1,000s. As UCSF professor Renee Hsia, who studies medical billing, told reporter Sarah Kliff in the story about the Band-Aid, “Facility fees are very arbitrary. There doesn’t seem to be any rhyme or reason to it.”
The Center for Public Integrity recently found that some hospitals were boosting their facility fees for patients as a way to juice profits—without providing better care, and without transparency. The Center estimates that hospitals charge as much as 70 to 90 percent more for many common procedures because of facility fees. With a more cost-transparent and efficiently organized system, it’s pretty clear that we could save a large percentage on hospital costs. Let’s call it 25 percent for now, and put our hospital figure at $550 billion.
(Note: There are also lots of hospitals and clinics that do elective medical procedures, like Botox and rhinoplasty. But that’s stuff people pay for out of their own pocket anyway. Everyone knows you’ve gotta pay full price if you want to put bling bling on your raygun.)
The CDC says there are 1.4 million nursing home residents, and 1.3 million hospice patients in America. The difference between the cost of living in a nursing home and home hospice care is pretty stark: $83,580 to live in a nursing home all year, and $183,960 to have a health aid at home with you 24/7. Nursing homes have all sorts of problems (and apparently make only an average of 2% profit margins). It’s pretty clear that patients aren’t getting much attention from aids if a nursing home costs less than half of hospice care, and that cost includes food and board.
If we assume that 1% of Americans need long-term care (this would be 3.2 million, which is more than the current 2.7 million, but let’s do it to add some cushion to our calculation), and we decided to put half in hospice and upgrade nursing home budget by 50% to improve conditions, this would cost about $500 billion.
So let’s add it up
Doctor stuff: $288 billion
Hospital stuff: $550 billion
Drugs: $320 billion
Long-term care: $500 billion
Divide this by the 320 million people in this country, and we’re almost at what every other developed country’s health care costs per person: $5,181.
So this is roughly what health care ought to cost. Now it’s time to build us a new raygun operation.
III. How to fix the system with “Trickle-down Health Care”
After the alien problem came to a head, Congress got together and decided to set aside their differences in the interest of winning the war on termites.
The first thing they did was redirect all the money that was going to ET Insurance to hire an army of raygun-weilding soldiers and and carpenters for every town in America. This was the whole country’s risk problem, so it was time to stop outsourcing it to a weird set of not-that-transparent raygun risk companies.
Immediately, towns found that homeless people — and people with moderate termite problems — were getting their stuff fixed sooner. This led to fewer collapsing houses, and fewer huge carpenter fees. People were able to go to work more instead of staying home dealing with termites. Productivity started going up.
Then a group of raygun scientists created a new invention that changed everything: Force fields.
You know what’s better than shooting termites with a raygun? Keeping them out of the house with a force field.
The country started using some of the money saved on ET Insurance to give people force fields. Soon, fewer and fewer people were having termite problems at all. This meant that when someone’s house did have a problem — say, when something broke down just from being old, or from accidentally riding a bike into the garage door — we could afford to send carpenters over to do a super duper repair job.
Before long, a new study came out saying that America’s houses were starting to be more durable than even Japan’s.
Okay. This is the part where we try to coin a new phrase: Trickle-Down Health Care. Tell your friends.
We’re borrowing the trickle-down term from the economic idea that benefits flow throughout a system if you tip it the right way. (Not going to argue about trickle-down economics in this post; they’re irrelevant but for the name we’re co-opting.)
Trickle-Down Health Care is a system where you align health care profits with health instead of risk tolerance, and let savings, innovation, and economic gains trickle throughout the system. In truth, it’s a combination of ideas that other people have come up with.
It means that if you do this…
- If you shift the profits of health care away from abstracted third parties and toward the health care providers themselves, savings and better health will trickle down to patients.
- If you shift the economics of health care toward preventing poor health versus simply fixing health problems after they get bad, long-term health and savings will trickle down to patients.
… then this results:
- Better overall health, which leads to more productivity in the economy and higher GDP, which raises the quality of life for everyone.
- Savings on health care frees up people’s income, which means people spend money on more diverse parts the economy and start more businesses, which leads to a happier middle class and more successful businesses across the country.
The theory itself is simple. The implementation, of course, will be tricky. It’s going to require a slight but important shift in the way we view health itself. We have to start thinking of it as it is: A war on sickness. A war that makes everything better when we’re winning.
Principle 1: Shift the economics of health care toward health providers
One of the tough things about health care costs is it’s hard to predict when you, as a healthy person, might get into an accident and need 10 times as much care as you usually do. This is why we spread the risk through insurance.
Unfortunately, as we’ve learned, spreading the risk via a for-profit third party removes us from the costs and profits. This hampers competition, capitalism, and market forces that might work in our favor.
Right now, when experts talk about the free market and health insurance, they basically are saying, “You are free to choose any craps table in the casino.” However, in reality you’re probably limited to just one or two tables that you can actually play at because your employer only works with one company, or your local area only has one affordable option. The tables almost operate in little monopolies. The fundamental economics don’t really change from table to table; profits don’t trickle down to health because they favor the house.
If, however, we built a casino where the house did not take a cut from the game at all, everything would change.
Say the house didn’t get a cut of the game. Suddenly, everyone could put less money on the table without changing their outcomes. The 50% who don’t get sick, still don’t get sick — they’ve just spent less money on the risk. The other 50% who get a little or really sick still get health care — and they’ve spent less money, too.
In that scenario, we’d probably even feel comfortable putting a little bit more in the pool to pay doctors and inventors to improve the quality of our care. We’d still be saving money versus before. In fact, if we paid the doctors a little more, we’d end up needing to go to the doctor less, which means we’d be able to pay less in the long run.
This would mean that we could build a casino that wouldn’t need so many craps tables. Maybe one for every state. Or just one big one for everyone.
But wait, you might be saying, this sounds a lot like that whole “single payer” health system I keep hearing people talk about.
It is. But before we react to the term itself, let’s talk through two important twists that don’t get talked about much with single-payer proposals:
First, our Trickle-Down system adds more free market choice than today’s health care system—before or after the ACA. Right now, choice is limited and transparency is nonexistent. By eliminating the inefficient layers in the system, we’ll eliminate the mini-monopolies that don’t allow you to choose which doctor you want to see. (It’s not really free-market choice if your insurance only allows you to go to certain providers, and if the best providers opt out of insurance because they get screwed on it (like one doctor I see does).)
If we consolidate the casino, we’ll be able to open up cost transparency to the public, so we the people (and watchdog groups) can effectively call out any bad deals, and the system itself can have the bulk power to negotiate better prices when necessary.
When we look at the fundamentals, this is really the same risk game we’re already playing, but the incentives have now shifted in a way that will trickle down to better health, savings, and GDP. With the casino redesigned this way — and with preventative health care incentives in place (which we’ll address the mechanics of in a minute) — we are prepared to add money to the economy. The Integrated Benefits Institute calculates that the US loses $576 billion every year to lost productivity from health problems, between sick days and worker’s comp. (Gallup reports that about 1/3 of that is just from people staying home from work due to weight related problems or chronic conditions like heart disease and diabetes, and the CDC has a similar estimate.)
If, through better economics for health providers and better preventative medicine, we cut that productivity loss in half, we’d add a quarter trillion dollars a year to GDP. Nearly twice as much as we’d be spending on preventative care in the calculation above. (This is on top of the cost savings in health care itself.)
Second, we should not operate this like a standard government-run industry, like the Postal Service. This is the fear a lot of people have about the government getting more involved in health care than it does already — that going to the doctor will be like standing in line at the post office, with depressed, underpaid workers slowly stamping things. Instead, we’re going to approach funding and managing health care like we approach the US Military.
The US Military offers us an extraordinary paradigm for Trickle Down Health Care because it operates on the following principles:
- The military is about keeping us from dying (and helping us enjoy the quality of life we want). I.e. We don’t want bad guys killing us or taking over.
- We are willing to pool together to pay for military protection because said livelihood is on the line.
- Good military defense is less costly to society than waiting for catastrophe and going on military offense. Prevention is better than intervention.
- Because of its life-and-death nature, the military’s budget is managed by one party (the federal government) rather than an inefficient web of third parties. But it still manages to be incredibly innovative because it works with private businesses who compete for contracts to develop technology for it.
Human health care should basically mirror this:
- Health care is about keeping us from dying (and helping us enjoy the quality of life we want). The bad guys in this case are disease and accident.
- We are willing to pool together to pay for health protection because our lives are on the line.
- Preventative health care is less costly (to individuals and society) than waiting for catastrophe and going under the knife.
- Because of its life-and-death nature, the health system’s budget is managed by one party (the federal or state government) rather than an inefficient web of third parties. But it will still manage to be innovative if it works with private businesses who compete for contracts to develop life-saving technology for it.
Basically, the plan would involve replacing health insurance with health tax that mimics military funding — resulting in lower overall cost — and shifting the capitalist/innovation competition to where it will make the biggest long-term impact:
Principle 2: Shift the economics toward preventing health problems
The CDC says that 75% of health care spending goes toward chronic diseases that can be prevented. These include diabetes, heart disease, and many types of cancer. If we spent more money on preventing these things, we could save money on treating them down the road — and more people would live longer, more productive lives.
But in a given year, only 13% of Americans go to a doctor for any kind of preventative care.
One of the reasons we don’t do more preventative medicine is our system pays based on “procedures” rather than on health. In other words, doctors have a financial incentive to specialize in treating the really bad problems. Heart surgery pays more than preventing heart disease. So, whereas many (I’d dare say most) doctors do what they do because they want to help people, if you’re trying to make a good living to take care of your family, you’re more inclined to specialize in complex procedures. The current system creates a perverse financial incentive to treat emergencies rather than prevent them, which ironically leads to lost productivity and a worse middle-class economy.
If we financially incentivized patients and doctors to prevent health problems instead, we’d reverse that.
The health care system can basically do *four things to help us prevent future problems:
- Preventative screenings: We can screen for future problems by visiting a doctor regularly for tests even when we feel fine.
- Vaccines: We can block some diseases ahead of time with drugs.
- Education and advice: Doctors can inform us what we individually should do to stay healthy and prevent problems.
- * Make primary care more relationship-based: Experts have pointed out after the first version of this post that we were missing one of the biggest factors in preventative health care: developing an ongoing relationship with one’s primary care doctor. Someone who knows you and your medical history well will help you with long-term health maintenance better than going to different doctors every time.
These can really all be combined. Many people already go to the doctor annually for a “physical” checkup, but most people don’t get screened for diseases like cancer or scanned for common problems while they’re at it. A regular checkup that also screened for looming problems could be combined with a custom consultation where the doctor gives you advice on how to stay healthy and also administers any vaccines you need.
Let’s say that every American did this once a year. Here’s how much that would cost per person:
- 30 min of the doctor’s time to examine and advise: $75
- 60 min of combined doctor’s staff time to perform screenings: $70
- Petty supplies like exam gloves and those popsicle sticks to put down your throat: $5
- Lab work/supplies/machinery for screenings and scans: $100
- Re-upping necessary vaccines: $75
- Overhead costs for doctor’s office (same as before): $150
Total cost per person per year: $400
But of course, in our system, this would be free for patients. In fact, we’ll pay people to do it.
Note: We’re going to presume that offices will share machines like CT scanners, X-Ray machines, and other big screening equipment between doctors. Those costs are factored into the Lab work and Overhead calculations here. (A million-dollar MRI machine doing 16 scans a day over five years ends up being $50 per patient. Similarly, a 3D mammogram machine could take care of 32 patients a day, costing $12.50 per patient if the machine lasts 5 years. That’s without any price negotiation when buying the machines.)
Now how do we financially incentivize doctors and patients to do this once a year for everyone? This is a place we can have some debate, but a simple answer would be twofold:
- Pay prevention doctors more.
- Give patients a tax break every year that they get a prevention checkup. (If you get unhealthy, you are going to burden the economy and everyone else in it, so you should get rewarded for practicing preventative health.)
If a specialist who might make $300,000 a year specializing in treating heart disease was paid $400,000 a year to prevent heart disease, we’d see a lot more clinics offer prevention care. That would bump the cost per checkup to $500. (A nice side benefit of this is if doctor clinics bring in more money, the experience of going to the doctor itself will likely improve for people. Happier doctors, better facilities, etc.) I’d suggest that we actually pay the doctor’s clinic a $25 stipend or subsidy per successful prevention checkup, so the money can be spread between doctor, staff, and budget for facilities and technology that could make the experience better or more efficient.
If patients were paid $500 in their tax returns if they got an annual checkup, they would fill those clinics up. We’ve now moved both supply and demand in the right spot for Trickle Down Health to work.
Another thing that would happen if we shifted the economics this way is we would incentivize more research and technology companies to work on inventing more effective ways to take care of preventative health care. The innovation sector would then start to help reduce doctors’ costs for this type of work. (There’s lots of stuff we could discuss here later.)
With this math, the total cost of prevention checks for the U.S. population is $160 billion a year. Add on the tax refund for patients, and it’s $320 billion in total.
The big question now is what could go wrong?
IV. How we’d implement it, and what would happen
Truth is, this is not something we could implement overnight. This would be a big project.
The first step would be to get rid of health insurance. This has ramifications of course, which we’ll discuss shortly. But it immediately frees up a lot of money.
Next, we’d need to gather money into a fund. No small feat, but I like imagining jumping into a swimming pool of all of it first before we start spending it.
Basically we could get the funds in a couple of ways:
- Redirect existing Medicare and Medicaid funding: We’d redirect money that’s already being taken out of taxes for health care and put it toward the new system. This spend will be more effective when we make the whole system efficient.
- Employers’ benefits plans: We’ll redirect the money that companies used to pay for their employees health insurance, and put it toward a payroll tax that goes to our health care fund. Employers that never paid for health insurance will start paying this tax. (A professor at University of Massachusetts named Gerald Friedman recently did math on this here. He estimates the payroll tax at 6% for high incomes and 3% for low incomes—which should save most companies money overall versus insurance.)
- Unearned Income: If we wanted, we could put a small tax on things that make money without humans doing work. Things like dividends and interest. (There’s a really interesting Medium post by Matt Bruenig here about how this kind of passive income could be used to fund a universal basic income, but though that’s way out of our wheelhouse in this post, the same concept could be a good potential source for health care funds.)
Remember again that even though this would be tax money, everyone would save money if we did this. Companies would end up paying just as much or less toward health coverage. And everyday people would pay less—rich and poor alike. Remember that insurance is required right now, so we’d be effectively replacing a tax with a lower tax.
Who would run the new system?
We would need the world’s smartest medical minds to come together in one department to run our new health care system. There are a couple of options for where we’d put it:
- We could make a brand new agency and start from scratch, which might be a good way to get rid of systemic bloat.
- Or we could put it under the existing US Department of Health and Human Services, which already has infrastructure, talent, and know-how to do this sort of thing as it’s running the Medicare and Medicaid programs right now.
The easiest thing to do would be to simply make our new health system an expansion of Medicare under HHS, which 61% of Americans already think is worth the cost. But if we think the other 39% disapproving is too high, I am in favor of scrapping the old Medicare and building a new department underneath HHS from scratch—like a startup. We could redeploy the great people working on Medicare to help administer our new department.
What would the financial ramifications be?
The first thing that would happen if we switched to Trickle-Down Health Care is we’d immediately cut the cost of US health care in half.
We currently spend $3.3 trillion a year on it. As we calculated above, we’d spend about $1.66 trillion on this new one without the prevention stuff. If we added a preventative health screening and incentives for every American each year—paying those doctors handsomely—our total bill would be just under $2 trillion. So right off the bat, instead of $10,000 a year on health, we’d each be paying around $6,700. This is close to the average business’s health insurance contribution per person. Which means we could probably fund the system without taxing individuals directly.
This doesn’t even include the potential for reducing exorbitant costs of drugs, devices, and further facility fees due to the lack of transparency in the current system. Putting everything under one roof will allow us to audit crazy pricing that doesn’t map to value. And we could negotiate bulk discounts with drug and device makers at a scale the old system can’t.
There will be some administrative costs of overseeing this system on top of what we’ve calculated, but they’re going to be offset by the savings in administrative costs of dealing with insurance. According to at least one study, doctors spend nearly an hour a day dealing with insurance. Fifteen percent of bills get denied by insurers initially, even though 80 percent of those denials get eventually paid by insurance anyway. We’d eliminate much of this money-wasting back-and-forth with the new system, an estimated $293 billion in admin costs. And we already have a Department of Health and Human Services with lots of staff overseeing Medicare and other things that we can largely redeploy on administering our new system.
What would we do with the savings?
There are two things we can do. We can either be satisfied with our new raygun, and let people keep the savings. Or we can plunge the rest of the money we were paying into R&D so we can develop the most kickass raygun ever.
I’d propose we do the first for now, but we also take a small amount of those savings and put them toward X-Prize style innovation competitions for private startups and contractors to win money for inventing technology and drugs that change the world and make costs lower for all of us.
But what about free riders? Won’t people abuse the system?
There are a lot of people in America who don’t have health insurance who go to the hospital for emergencies whose bills we end up paying for via higher insurance premiums right now. And there are 50 million people on Medicare right now whose care we all pay for through taxes already. If all our health care was pooled and managed through Trickle-Down, those groups would get pooled in, and the difference wouldn’t matter. The total tax burden would net out to less than we’re paying now. So Medicare would be gone, and those who are too poor to even have a tax bill would be taken care of like they are today — just now we’d get them regular preventative care, too!
Would making health care “feel free” result in a swarm of people just going to the doctor all the time and taking advantage of it? This is a valid concern. The good news is it’s not like giving out free beer. Most of us don’t love going to the doctor. The vast majority will only go when we’re sick or suspect we’re sick. We will probably go a little more often if it doesn’t cost, but we’re accounting for a 25% increase in doctor visits already, and all estimates point to those visits helping us to get less sick in the long run. Every person in America would have to go to the doctor 14 times a year (instead of 4) to add up to how much we’re paying today. This simply isn’t going to happen.
What about dental care?
I suggest leaving this one alone for now. We could roll it into the broader health care plan if we wanted to, but I would propose we consider this more of a “nice to have” or an “emergencies are covered” kind of thing. Let the current market and private insurance system continue for dental.
Will quality of care go down?
The simple fact is that a whole bunch of countries with single payer systems have higher quality health than America. Canada, United Kingdom, Germany, Australia — the list goes on — they’re all healthier than us. The key to keeping the quality up is funding it appropriately to incentivize good health.
The US Military is the best in the world because we invest a lot in it. For our any decent health system to work, we will have to pay doctors and nurses and hospitals well. The good news is that Trickle-Down Health Care encourages innovation where it counts, which will lead to higher quality care.
Yeah, but haven’t Canada and other countries done the single payer thing, and don’t they come to America for health care because theirs sucks?
These are common misconceptions, thankfully! Yes, Canada and other countries—in fact, every big first-world country with good health—has a single payer system of some sort. But as we’ve established, those countries have lower costs and better health outcomes than America already. Proof is in the pudding, as they say.
But yes, Canadians often travel to the US to get health procedures. That’s not because of Canada’s health care quality, though. It’s because Canada has 10 times fewer people, and therefore 10 times fewer doctors. It means that the population is too small to generate enough demand for some really specialized procedures. If there is one specialist in the world for a given condition, she or he is likely to be in a big metro area like New York or Los Angeles. That doesn’t mean that doctors in Canada are bad.
Also, if you live in Winnipeg and need to see a specialist, it’s easier to get to Minneapolis to see one than it is to get to Toronto.
Anyone who says that health commuting means that Canada’s health system doesn’t work probably just doesn’t know Canadian geography—or they’re deliberately twisting facts.
How do we make sure that our health system doesn’t end up with long wait times, rations, or any other horrible thing that makes it resemble the post office?
If you work for the US military and you get sick or hurt, they take care of you immediately. That’s because we spend real money to make sure the supply of medics and medical care is high quality and highly available. If we take care of the actual providers of medical care, we’ll be fine on this front.
Who’s going to make sure things like prices don’t get out of hand?
The downside to the military analogy is we occasionally hear stories about contractors charging the government $1,000 for Army toilet seats. For better or worse, we continue to fund the military in a big way despite this because it’s worth it. But the biggest way to avoid this sort of thing is to practice radical transparency with the costs of our system. Just like many cities post their employees salaries and their budget expenses on transparency websites, we’ll require that every piece of health care spending be published openly on the web.
There will be a market competition dynamic in many areas, too, like we see with military contractors and to some degree with doctors’ reviews on places like Zocdoc, that will help us maintain quality and costs.
One thing that will make a big difference is having the oversight of the whole system be overseen by doctors, hospital administrators, and medical technologists. Just like the military is run by generals who know it inside and out. We would want to have the upper levels of administration be much more transparent with patients and doctors than the generals of the military are today, as there will be no valid reason to keep secrets like the military leadership might need to.
How can technology make this system even better?
This part gets me excited.
- Apps that allow you to get diagnosed and prescribed by a doctor over FaceTime can end up saving us tons of money—and making doctors’ lives nicer. (This would be great for doctors who need to spend more time with their families or work part-time.) Essentially, routine checkups for things like coughs and depression could be done like Uber does for black car service.
- In the era of big data, we can prove that we make healthy choices by wearing Fitbits and other monitors. Those who wanted to share that data with their doctors could be eligible for more tax refunds, etc. (One downside to this is it’s easier to be healthier if you’re wealthy, so we’d need to think hard about this one and how to make it unfair to less privileged people.)
- We should definitely set aside funding for investing in companies that develop groundbreaking tools and technology. Like I mentioned before, I love the X-Prize model. A recent report explained by The New York Times indicates that as much as 2/3 of the increase in health care spending over the last few years is because of technology that improves health care but costs a ton. On the one hand, inventors and private companies should be rewarded for innovation that saves lives, but on the other hand, because the costs of life-saving new technologies today are buried behind layers of insurance and administration without transparency to the end-consumer, some of these costs are unnecessarily inflated. A transparent system with a single payer can help with price negotiation to keep such costs from skyrocketing, while an award system a la X-Prize can make sure innovators still get paid. This is an area that deserves a lot of discussion. (I would love to hear the health technology investor’s point of view, or a technology economist’s, for example.)
What about the insurance industry and all the people working in it?
There are lots of types of insurance. Trickle-Down Health Care won’t touch life insurance, auto insurance, dental insurance, travel insurance, renter’s insurance, pet insurance, disaster insurance, business insurance, and so on. So most of the insurance industry and its jobs will remain intact.
But in truth, it would be the end of the health insurance industry. And that means jobs would be lost. Including the jobs of people I personally know and care about and work with. This is the hardest part for me to stomach in writing this post.
About 460,000 people worked in health insurance at last count. (Many of them work on life insurance at the same time, though, which wouldn’t be affected.) In utilitarian terms, the benefit of a better health system for 320,000,000 people outweighs that of the jobs of 460,000 people by a lot. But it’s cold to just leave it at that.
I think the right thing to do would be to fund a way to redeploy people from health insurance to new jobs, and to otherwise take care of them as we switch to Trickle-Down Health Care. First, a lot of these employees would move to the public sector to help administer the new program. But we could (and probably should) offer a host of things for displaced health insurance workers, including free retraining for health R&D and health tech jobs, a break on the health care taxes, special unemployment stipends and free higher education as people are looking for new jobs, and early retirement for everyone over 50. It would not cost much in the grand scheme of things.
I believe humans have a right to health care; but even if you don’t believe that, there’s a huge economic argument for changing our system this way. With Trickle-Down Health Care, we can retire our used raygun and brandish a brand new one—the best in the world—next to Sweden’s and Germany’s and Japan’s on the global battlefield in the war on sickness.
Which is something I think Republicans and Democrats both would like.
Shane Snow is a journalist, speaker, and entrepreneur in New York City.