By Paul S. Hewitt and Phillip Longman
Washington Monthly, April/May/June 2018
Obamacare has taken a licking but keeps on ticking. But while progress has been made on expanding access, another problem keeps getting worse: the soaring cost of health care for those who get their insurance through their employers. For these folks—who make up the majority of middle-class, working-age Americans—the ever-rising costs of premiums, deductibles, and co-pays has turned into a full-blown crisis.
Take a median-income family of four whose members are covered by a standard employer-sponsored plan. Last year, the amount that hospitals, doctors, and other providers charged to treat such a family reached an average of $26,944, according to the Milliman Medical Index—nearly $9,000 higher than in 2010, when the ACA was enacted. Families typically paid about a fifth of that difference directly in the form of increased premiums, deductibles, and co-pays. Who exactly paid how much of the rest is not certain, but it’s axiomatic among economists that employees bear most if not all of the cost of employer-sponsored health care. To employers, health insurance is just a form of employee compensation. When the cost goes up, they typically respond by cutting back on raises and other benefits.
Fortunately, there’s a straightforward way to attack this middle-class affordability problem. The Affordable Care Act dramatically tightened existing price controls on health care purchased by the federal government. It did so by setting fee schedules for how much doctors and hospitals can charge Medicare, Medicaid, and other federal health care programs for performing specific services or, in some cases, treating specific conditions. Similar price controls apply to Medicare Advantage Plans, under which private insurers are allowed to contract with providers at Medicare prices.
The answer to the most pressing aspect of our health care crisis is simply to apply these cost controls to commercial plans as well. For a typical middle-class family, such a move, if enacted today, would drop the total price of health care by about a third in the first year, without having to pass any new taxes and without forcing anyone to change their health care plan. Proof of concept comes from the fact that we already do this for everyone covered by Medicare and Medicaid. You’ve heard of single-payer. This is the case for single-price.
For people with commercial insurance, it keeps getting worse.
How did this happen?
A major, underappreciated reason is that in most markets, medical providers have merged with each other to the point that they effectively operate as local monopolies.
Where health care consolidation is strongest, hospital prices run roughly 20 percent higher than in markets where some real competition remains. Since we first wrote about the phenomenon in these pages (“After Obamacare,” January/February 2014), a vast literature has grown up confirming that monopoly in health care is a major factor pushing up prices for Americans not covered by Medicare or Medicaid.
What would happen if we just took the single measure of applying Medicare prices to all commercial health insurance—and did nothing else? According to a study by the Congressional Budget Office, the price for a one-day hospital stay is 89 percent higher when charged to commercial insurance plans and their customers than when a Medicare patient stays in the same bed for the same amount of time. Overall, the discounts Medicare and Medicaid receive are in the 20 to 40 percent range. Thus, if done at a stroke, the first-order effect of imposing Medicare prices universally would be to reduce the price of the health care received by a typical family by about one-third. That would translate into annual savings of about $9,000 today, and much more over time. The savings would still be substantial even if we implemented the plan in phases to ease the transition.
Wouldn’t “Medicare prices for all” cause massive disruption across the health care sector? Yes, but in a good way. Importantly, hospitals that disproportionately serve low-income and elderly patients—typically found in rural or poor, urban locations—would be the least affected. That’s because they already know how to break even or even earn a surplus at Medicare and Medicaid prices. Unable to pass inflated costs along to patients with commercial insurance, they’ve had to learn to be more efficient.
The same is true more generally of hospitals that lack monopoly power. Studies show that hospitals with real competition in their local markets have found ways to lower costs to the point that they can get by on Medicare prices. These hospitals might even welcome a move to universal Medicare prices because it would help level the playing field with monopolistic competitors when it comes to recruiting and retaining doctors.
It would be a different story, though, for hospital systems that have been living high off their ability to extract monopoly prices from commercially insured patients. These hospitals will scream that they are already losing money on every Medicare and Medicaid patient, and that unless they are able to inflate the prices they charge commercial payers, they will go broke. But the reason they lose money on Medicare and Medicaid patients is that their costs are too high. And the reason their costs are too high is that they don’t need to cut them so long as they can gouge commercial payers—which, as monopolies or near monopolies, they can. The majority of these hospitals are classified as nonprofits, so the revenue from their high prices doesn’t even have to go back to shareholders. Instead, it turns into inflated salaries for administrators, lucrative contracts for specialists, and, often, giant building projects. In order to survive on Medicare prices, they would have to become much more efficient and cost conscious.
In normal markets, price controls are seldom a good idea. But health care is not a normal market. Purchasers, whether consumers, insurers, or employers, have a hard time evaluating the quality of medical services, for example. There are also all kinds of agency problems involved with so much care being purchased with other people’s money, and a moral problem involved with the fact that a large and increasing share of the population can’t afford to pay the price of their own health care. And that’s all before you get to the problem of industry consolidation. In highly concentrated, opaque health care markets, administered prices are the only real alternative to prices dictated by the fiat of monopolists.
These are the reasons why literally every other developed country in the world uses administered prices in health care, including countries that rely on privately owned hospitals and entrepreneurial doctors. And it’s why their use in the Medicare and Medicaid programs has been successful in containing cost inflation while predatory pricing prevails everywhere else in the increasingly cartelized U.S. health care sector.
The idea of applying Medicare and Medicaid prices across the board is so compelling that it has started getting serious attention from influential policy wonks. On the conservative side, the Council for Affordable Health Coverage recently issued a white paper that calls for the expansion of Medicare prices to commercial plans. On the liberal side, Princeton’s Paul Starr broached the idea in an article in the American Prospect in January. More recently, the Center of American Progress has included the idea in a policy paper.
But there are very strong reasons to believe that starting with price controls alone is a better idea than trying to achieve them and universal coverage in one shot.
Medicare for All advocates make the case that, despite the sticker price, the plan will actually bring down overall health care spending by imposing lower prices on providers and saving on administration. But here’s the problem: almost all of those savings will come from money that voters don’t know they’re currently spending. More than 150 million Americans have employer-sponsored group health care plans. They can see what they are forking out directly for premiums, deductibles, and co-pays, and they don’t like it. But they are largely innocent of the far greater amounts they pay in lost wages. In a typical employer-sponsored family plan, two-thirds of the premiums are nominally paid by the employer, who in turn shifts much if not all of that cost to employees by reducing other forms of compensation. Yet few employees are aware of this reality. So selling a single-payer system involves promising to save people money on costs they don’t know they pay, while at the same time telling them that they’ll have to share more of their paycheck with Uncle Sam. Not easy.
So why not just keep it simple, at least to start? A “Medicare prices for all” plan doesn’t require tax increases or involve transfers paid for by the middle class. It doesn’t require Americans to give up their current health care plans. And it doesn’t repeal or replace the popular features of the Affordable Care Act. But it does directly attack the middle-class affordability crisis using a proven approach that the great majority of Americans might actually support.
Paul Hewitt is an economic adviser to the Council for Affordable Health Coverage. Phillip Longman is senior editor at the Washington Monthly and policy director at the Open Markets Institute and author of “Best Care Anywhere – Why VA Health Care Is Better Than Yours.”
California Legislative Information; AB-3087 California Health Care Cost, Quality, and Equity Commission
This bill would create the California Health Care Cost, Quality, and Equity Commission, an independent state agency, to control in-state health care costs and set the amounts accepted as payment by health plans, hospitals, physicians, physician groups, and other health care providers, among other things.
The bill would require the commission, beginning July 1, 2019, to annually determine the base amounts that health care entities, as defined, are required to accept as full payment for health care services, and would specify that the base amount for a health care provider shall be a percentage of Medicare rates not lower than 100% of Medicare rates.
The bill would require the commission to obtain the information necessary to determine total health care expenditures and to set a global growth cap for total health care expenditures, as specified.
Physicians converge on Sacramento to oppose dangerous rate setting proposal
California Medical Association, April 30, 2018
Over 500 physicians, medical students and stakeholders gathered in Sacramento on April 18 to bring the voice of medicine to legislators for the 44th annual California Medical Association (CMA) Legislative Advocacy Day.
Wearing white coats, physicians converged on the Capitol to educate legislators about critical health care issues, including a radical physician rate setting proposal (AB 3087) that would increase patient out-of-pocket costs, create state-sanctioned rationing of health care for all Californians and force physicians out of state or into early retirement. Informing legislators about the negative effect this dangerous rate setting proposal would have on access to care in California was the top priority for attendees.
By Don McCanne, M.D.
There is broad agreement that the two most important factors that lead to our egregiously high health care costs are our high prices and the profound administrative waste in our fragmented health care financing system. Paul Hewitt and Phillip Longman, in their long Washington Monthly article (long, but worth the read), make the case for rigid price regulation.
Although they and others contend that price simplification would address the administrative waste as well, the impact would be very small since the highly inefficient, dysfunctional financing infrastructure would remain in place.
Since affordability is the number one health care concern according to many polls, would establishing a unified pricing scheme (all-payer or single-price health care) be welcome as an incremental step since it would be much less disruptive than converting to a single-payer improved Medicare for all? Hewitt and Longman seem to think so.
But we should look at California’s current effort to enact a universal pricing system: AB-3087 California Health Care Cost, Quality, and Equity Commission. Use the link above to access the bill, and then click on the “Bill Analysis” tab. Though you likely don’t have time now to read the 28-page analysis, just glance at the last three pages for support and opposition. Support includes the cosponsors: California Labor Federation, Health Access California, SEIU California, and UNITE HERE along with about two dozen other organizations. Opposition fills most of the three pages and includes much of the medical-industrial complex in California. The release from the California Medical Association (above) gives you an idea of the fervor of the opposition. These organizations are not convinced, to say the least, that this legislation would not be disruptive. AB-3087 is doomed.
So why don’t we move forward with reform that would address both our high prices and the administrative waste, not to mention all of the other measures of a well designed single payer system – an improved Medicare for all – that would correct the deficiencies in our financing system while improving the allocation of resources within the health care delivery system?
Hewitt and Longman present an interesting twist on the argument that it is not politically feasible. Read the paragraph near the end of their excerpts above that begins, “Medicare for All advocates make the case that…” They make the case that most individuals do not realize how much they are already spending on health care since much of it is hidden from them, whether it’s the employer’s contribution to their health plan or the massive amount we are already paying through the tax system – almost two-thirds of all health care spending if the purchase of plans for government employees and the huge amount of tax expenditures for employer-sponsored plans are included. Hewitt and Longman say, “So selling a single-payer system involves promising to save people money on costs they don’t know they pay, while at the same time telling them that they’ll have to share more of their paycheck with Uncle Sam. Not easy.”
Now would it be that difficult to let people know about the hidden costs of health care that they are already paying? Do people really prefer being kept in the dark by an opaque financing system rather than being enlightened by the transparency of financing through an equitable tax system, especially if the amount being spent is somewhat less for all but the wealthiest of us?
Can you imagine the typical American saying, “Okay, so we’re spending more now and getting less than we would be with an improved Medicare that covered everyone, but just don’t tell me about it. Let me suffer in silence.” Are we a bunch of masochists?
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