This is Not My Beautiful Healthcare – Part 2
America has no national health strategy. And, the crisis we see in the U.S. healthcare system around COVID-19, as well as our out-of-control costs, reflect that lack of focus and a half-century-long lack of planning and misallocation of resources in our healthcare system.
During those 50 years, we’ve spent trillions building Christmas trees of fragmented and disjointed federal and state insurance programs in our pursuit of universal coverage. The result is a balkanized system with so many different programs and offerings that no one is in charge. This incremental insurance expansion has added complexity and inefficiency, resulting in much higher administrative costs – with 8% of spending in the U.S. going to administrative expense versus 3% spent in other developed countries.
For example, during the 1970s, rather than create a single program for disabled individuals, both the Medicaid and Medicare programs were expanded to cover disabled individuals, with slightly different criteria applied to each. Medicare expanded coverage to those qualifying for Social Security Disability Insurance (SSDI), while Medicaid covered those receiving the newly created Supplemental Security Income (SSI) program and some low-income disabled. This change was, of course, in addition to the Alcohol, Drug Abuse, and Mental Health Administration (now the Substance Abuse and Mental Health Services Administration, or SAMHSA), which had primary responsibility for behavioral health treatment and the organization and funding of those services across the country.
And, that wasn’t the end of Medicaid’s selective and disjointed expansion. What followed was the addition of Early and Periodic Screening, Diagnostics, and Treatment (EPSDT) for some low-income children and youth and intermediate care for developmentally disabled. Coverage was expanded for low-income pregnant women and children not receiving public assistance. Then we added Disproportionate Share (DSH) funding for hospitals serving large numbers of low-income individuals, and home and community-based services (HCBS). And, after yet another failed attempt to enact universal coverage during the Clinton administration, we adopted the State Children’s Health Insurance (S-CHIP) covering some low-income children who don’t qualify for Medicaid.
How did the promising reforms we enacted in the 1960’s fail to yield the improvements many had expected?
During this same period, we undermined and dismantled policies to control healthcare costs and address how and where care is delivered. These changes included eliminating or undermining Certificate of Need (CON), community rating, non-profit community benefit requirements, and antitrust limitations on market concentration. And many of the “improvements” that implemented, such as the creation of integrated systems (IDN’s, IHN’s or CHN’s) or value-based-purchasing (VBP), have fueled an ever-growing healthcare industry of mega health insurers and delivery systems.
The result is healthcare that is even more unaffordable, and therefore more inaccessible, for large numbers of Americans. Since the passage of Medicare and Medicaid, inflation-adjusted per capita healthcare costs have increased by 500%. And, during the heyday of mega health system creation and national health plan consolidation between 2000 and 2018, total healthcare spending MORE THAN DOUBLED to $3.6 trillion. And, we still had nearly 9% of Americans without insurance coverage for the full year in 2018 with growing numbers having insurance they can’t afford to use.
Newly implemented programs may have done little to improve access and outcomes. Instead, as multiple studies have shown, the primary driver of higher healthcare costs in the U.S. is the price we pay for our services. These ARE NOT the prices charged by insurance companies. These are the prices charged by those who deliver our care.
As Modern Healthcare pointed out in a 2018 article profiling a comprehensive study sponsored by JAMA (Journal of the American Medical Association), we pay more for everything. We have higher physician, nurse, and administrator salaries. As an example, they cite coronary artery bypass graft (CABG), which averages $78 thousand in the U.S. versus $34 thousand in Switzerland and $14 thousand in Spain. An abdominal C.T. scan averages $844 in the U.S. versus $483 in New Zealand and $85 in Spain.
The same study also points out that providers and executives are paid much more, with average U.S. specialist physicians making $316 thousand versus an average of $182 thousand. Primary care docs earn $218 thousand in the U.S. versus $133 thousand elsewhere. Even nurses earn $74 thousand versus $51 thousand in other countries. We also get much less for our money, with critical measures like life expectancy, infant mortality, and disease-free years at the end of life continuing to fall behind our developed peers.
Universal insurance coverage by itself will do little to address this issue unless it includes specific actions to limit the costs of care by thinking differently about how we support a healthy America.
Upside-Down Public Policy Focused on Sick Care
We’ve built an upside-down system in which solutions are focused on providing insurance and treatment for those who are already sick or at an age when health problems are more acute. At the same time, we’ve starved public health, prevention and primary care programs that would keep Americans from getting sick in the first place.
As a result of the formation of these massive programs heavily focused on sick Americans, Medicare (and to a much lesser degree, Medicaid) emerged as a primary driver of health policy and growth of the healthcare market through its dominance over health spending. As Rosemary A. Stevens, Ph.D. stated in a 1996 Healthcare Financing Review article: “[the] aggressive style of American medicine – science-based, disease-focused, technological, and interventionist – might be justified as a primary basis for national health policy in the future….invest in biomedical research and ensure population access to hospital and specialist care, rather than worry about primary care, long-term services, and comprehensive national health insurance. In essence, this is what Medicare was to do.”
The results of this backward approach to coverage, in which we won’t cover you when you’re well, but will when you finally get sick, were utterly predictable. Almost simultaneously, the system began to unravel as expenditures predictably followed the areas of most significant opportunity in the market, the rapidly growing elderly population (increasing from 10% of the population in 1970 and 16.9% in 2020) and disabled, who offered sure sources of financing through cost-based reimbursement.
This continued focus on a medical/technological model of health means that we have ignored many of the low-cost, public health solutions to improve the health of communities, reduce costs, and to be prepared for the kind of pandemic we are experiencing now. As total health expenditures have continued to grow, public health expenditures have declined by nearly 20% since 2000 alone. Additionally, 80-90% of public health expenditures are at the state and local level, with Federal contributions primarily targeted at emergency preparedness (ironic, given the current challenges we’re facing). By contrast, spending on public health programs in OECD countries averages 10%.
These reductions in funding occurred despite clear evidence of the benefits of these programs. According to the United Health Foundation America’s Health Rankings, “An investment of $10 per person per year in evidence-based programs in local communities that are proven to increase physical activity, improve nutrition, and prevent smoking or other tobacco use could save the country more than $16 billion annually within five years. This is a potential savings of $5.60 for every $1 invested.”
Loosening Regulatory Controls
This upside-down approach has accompanied continued loosening of regulatory controls and undermining of key protective features that had required industry participants such as not-for-profits to focus more heavily on population-wide benefits.
These changes occurred even though non-profits make up nearly 60% of providers, with an additional 20%+ being controlled by state and local governments. An even higher percentage of health plans are non-profits (63% of those with 100,000+ members), and even a higher number of smaller health plans fall into that category. This unraveling has included changes in the following areas:
Community Rating: Blue Shield plans were initially organized as insurers of last resort. However, during the 1950s, they had already begun moving away from community-rating as the commercial insurance industry, which was using experience rating, grew. By the 1960s most had abandoned community rating, with the result being increasing access and affordability problems for those in the individual insurance market with underlying health issues. Age-banded community rating was put in place with the passage of the ACA. During the intervening period, this change alone added significantly to higher uninsured rates and higher costs.
Certificate of Need (CON): On the provider side, CON programs, which regulated the building of health facilities and purchase of expensive equipment, were being abandoned at the federal level and loosened or eliminated at the state level. By 1987 the federal government repealed the CON mandate, and throughout the 1980s, states began retiring their CON programs. Within the next three years, twelve states had repealed their CON programs. And, although more than 30 states still have some form of CON program, most are limited with a more substantial focus on outpatient and other free-standing facilities and less attention directed to inpatient facilities, which are the most expensive part of the system.
Non-Profit Enforcement: Across the industry, the IRS failed to enforce requirements associated with the maintenance of non-profit status by healthcare organizations. Except for the Blue plans, which saw increased enforcement and some loss of tax-free status, there was little enforcement of the same requirements in other parts of the industry. The result has been massive increases in executive compensation, the building of enormous war chests and excessive levels of risk-based-capital (RBC), and lack of seriousness in meeting requirements to deliver community benefit, all of which have added to rapid cost increases.
Anti-Trust Enforcement: The loosening of antitrust controls across the industry has equaled the lack of attention given to the enforcement of non-profit status. Many mergers and acquisitions have simply flown under the radar as health systems have pursued smaller transactions that fail to trigger an antitrust review. And, the effects on the delivery of care, access to services, affordability, and community benefit are substantial. As Claire E. O’Hanlon a researcher on healthcare consolidation points out in a recent article in Health Affairs: “evidence suggests that non-profit hospitals are no more likely than for-profit hospitals to increase the charity care they provide as their market power increases.”
HMO’s Fuel For-Profit Insurer Growth and Integrated Delivery Systems
The emergence of HMO’s may have been the most critical market trend that has driven change and increasing costs across the system. It fueled the creation of some of the largest for-profit insurers. It also encouraged the creation of integrated delivery systems (most of which are not-for-profits), considerable investments in information technology, rapid industry consolidation and growth of mega-health systems, and massive increases in administrative costs.
Yet again the growth of HMOs and the for-profit insurance industry was primarily driven by the federal government as part of an effort to address calls for national insurance and rapidly rising costs. Health maintenance organizations (HMOs), which had emerged primarily in the west, were seen as an important innovation and solution to encourage a focus on health. The response was the passage of the HMO Act of 1973, which provided financing and incentives for their creation. Overnight, the industry exploded to 90 million members by 1999 and led to the formation of new, industry giants like United Healthcare.
Though some research suggests that HMOs have reduced the rate of healthcare cost increases, they have not lowered costs overall. Additionally, by their very nature, HMO’s require scale for efficient delivery of care and delivery management functions. In spite of mixed cost and outcomes results, the government has continued to promote them as a solution, liberalizing and then encouraging their use in Medicaid and then in Medicare with the creation of Medicare Advantage (M.A.) products. Those changes opened up the financially attractive and growing senior trade and the massive state healthcare markets to both for-profit and not-for-profit investors.
In response to the focus on HMO’s and a growing belief that vertically and horizontally integrated delivery systems could deliver better outcomes, the industry directed massive attention to the creation of ever bigger systems. Again, the government has helped fuel this growth by incentivizing the creation of Accountable Care Organizations (ACO’s) to compete for Medicare and Medicaid business. Many of these hospital systems have also pursued this growth in the belief that their formation is an appropriate defensive reaction to the growth of large insurers, requiring that providers become equally large and achieve significant or dominant market shares to secure profitable contracts.
The net result has been massive industry consolidation and the growth of mega provider organizations, most of which are not-for-profits, wielding extraordinary market power. The top non-profit provider organizations in the country have continued to see rapid increases in their net assets far above that of for-profits, as well as growing net income. Senior executives in these organizations are also richly compensated. The highest-paid executives make many multiples of the pay of their for-profit counterparts.
Again, much of the growth of these mega-systems and consolidation of market share has taken place in the face of only limited enforcement of federal tax regulations. Much of the concentration of this part of the industry has also taken place under the radar of antitrust enforcement, primarily through continuous smaller acquisitions that do not trigger reviews.
The benefits of this trend are far from proven. Though some studies have shown a correlation between improved quality and integrated care, few suggest integrated systems actually reduce costs. And, some question whether they even deliver on the first promise. As leading industry researcher Austin Frakt pointed out in a 2019 New York Times article, “studies show that rates of mortality and major health setbacks grow when competition falls. And there is also strong evidence that consolidation has contributed to increasing costs.”
As stated in the Urban Institute’s comprehensive January 2020 study on this issue: “Over 90 percent of hospital markets have become highly concentrated. In the meantime, hospital acquisition of physician practices, or “vertical mergers,” and development of multihospital health care systems crossing many local health care markets, or “cross-market mergers,” proceed unchallenged, despite evidence that both are associated with substantial price increases, without evidence of quality improvement or greater efficiency.”
The Emergence of For-Profit Healthcare
Finally, no evaluation of the current state of American healthcare can be complete without a discussion of the impact of the growth of for-profit entities in the industry, with particularly profound effects on specific sectors.
It’s tempting to place blame for higher costs on profit-making by health insurers. And, certainly, there are effects that may be unfavorable – as well as favorable. But, the overall contribution of this single factor is unclear. While the participation of these companies means some spending on profit, the average net profit for health insurers in 2018 totaled only 3.3% of the health insurance portion of expenditures. Nothing to sneeze at, but not the riches many believe.
However, that does not mean that healthcare is an unattractive sector for predatory investing and financial speculation, especially in many of the more ancillary services areas. Many of the most egregious examples of this have been in pharmaceuticals for which pricing is mostly unregulated. Fragmented purchasing across multiple organizations and government entities have encouraged financial arbitrage. Investors search for medications or whole classes of essential medicines where the market can quickly be secured, and prices can be raised to astronomical levels. Then they can extract massive profits before consumer backlash forces a course correction. “Pharma bro” Martin Shkreli is the poster child of this strategy but is by no means alone in pursuing these efforts, as is evidenced by extraordinary increases in essential medicines like insulin and Epi-pen prices that dominated headlines.
But, pharmaceuticals are by no means the only market segment targeted as an attractive sector for speculation and financial engineering. Many speculative investors, such as private equity and hedge funds shy away from larger health care sectors such as health plans and hospitals, which are low margin and subject to frequent regulatory intervention. But many target specific segments where they can exploit industry fragmentation.
Other industry features that have been exploited by investors include Stark laws that limit physician investment in businesses to which they refer; and, elimination of “corporate practice of medicine” laws that prohibited investment in physician practices. Both have led to substantial investment in physician practices and free-standing ambulatory services such as dialysis. The effects on those specific services can be significant with many experiencing rapid price increases and predatory billing practices such as those that have been widely reported in emergency medicine.
So, Where Does This Leave Us?
What each of these issues points to is an obvious conclusion that real healthcare reform is much more complicated than just providing universal insurance coverage, which is of limited value if care is unaffordable.
Meaningful solutions must address the many trends that have driven out-of-control cost increases and poorer clinical outcomes. And, in many instances, answers may be as simple as enforcing laws and regulations that are already on the books. Solutions MUST also be a data-informed analysis of the real drivers of improvement.
In future posts, I will dive deep into many of the topics included in this post. I’ll also discuss the real impact of many of the popular “solutions”, such as value-based purchasing (VBP), consumer-directed-health-plans (CDHP’s), and health technology promoted as promising solutions. I’ll offer other prescriptions for how we can begin to turn the corner on cost and start making healthcare more affordable.
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