By Jeffrey Sachs
CNN, March 1, 2019
Rep. Pramila Jayapal introduced a sweeping Medicare for All (MFA) bill on Wednesday (H.R. 1384), and the national debate on healthcare is bound to intensify through the 2020 election. Voters rank healthcare costs as their second most important priority, just after the economy. The political fate of MFA will likely depend on one key question: Will it reduce healthcare costs while preserving the freedom to choose health providers?
If properly structured, MFA can do that: cut costs while improving choice.
Medicare for All has come a long way since Sen. Bernie Sanders launched his 2016 presidential campaign on that theme, while fellow Democrats ran from the label. Sanders also faced the wrath of mainstream pundits like Paul Krugman, who described Sanders’ healthcare plan as “smoke and mirrors.” Now, every major Democratic Party candidate endorses the label, (though they will certainly differ on the details) and Sanders could well become president in 2021 on the basis of his clear and persistent MFA advocacy.
No doubt the debate will become heated, even shrill. We are talking about serious money, and the largest single sector of the American economy. Healthcare outlays in the United States account for nearly 18% of the country’s gross domestic product. Profits are soaring in the private healthcare and pharmaceutical industries, both of which will fight fiercely against MFA. President Donald Trump has weighed in, declaring that Democrats are “radical socialists who want to model America’s economy after Venezuela.”
While former President Barack Obama spoke out in favor of a single-payer plan, he avoided the battle back in 2009 with the Affordable Care Act. And by making health insurance available to millions more Americans, the Affordable Care Act allowed private industry to raise prices given the increase in demand. The result is that Obamacare expanded overall coverage, and provided hugely popular guaranteed coverage for pre-existing conditions, while avoiding any decisive steps on cost containment.
MFA picks up at that point. Real cost containment will be the critical issue that either makes or breaks each MFA proposal.
Americans currently pay around $10,000 per person per year in health outlays, compared with roughly half that amount in other high-income countries such as Canada, Japan, the Netherlands, or Sweden. The reasons have been debated and studied in detail. Do Americans use more and better healthcare and therefore also pay more? Alas, no. Americans use roughly the same or less healthcare, but pay far more for health services including drugs, hospital stays, and medical procedures such as an MRI.
The Canada comparison
A comparison of healthcare costs between the US and 10 other high-income countries allows a detailed comparison of the US and Canada, the most relevant peer country. According to the comparative data, the US spends 17.8% of GDP compared with Canada’s 10.3%, amounting to $9,403 per person in the US compared with Canada’s $4,641.
All Canadians are covered by the healthcare system, while 10% of Americans lack public or private insurance coverage. Total pharmaceutical spending per person per year averages a whopping $1,443 in the US, compared with $613 in Canada.
For example, the cholesterol drug Crestor is $86 per month in the US, and $32 in Canada; the arthritis drug Humira is $2,505 in the US, compared with $1,164 in Canada. Yet despite the much higher health spending per person, life expectancy in the US is 78.8 years, while in Canada it is 81.7 years.
The article reaches the following conclusion: “The United States spent approximately twice as much as other high-income countries on medical care, yet utilization rates in the United States were largely similar to those in other nations. Prices of labor and goods, including pharmaceuticals, and administrative costs appeared to be the major drivers of the difference in overall cost between the United States and other high-income countries.”
Huge private costs in the US
US private health insurance costs are out of sight. A typical US family of four covered by employer-based health insurance pays, in total, around $28,000 per year, taking into account the insurance premium paid for by the employer out of the worker’s total compensation, the premium paid directly by the household, and all of the extra costs, including deductibles, co-payments, and out-of-network payments. The cost of healthcare is crippling working-class families, which may explain why it is at the top of the political agenda.
What is the reason for these extraordinary costs in the US? Astronomical administrative costs, for one, are the result of countless and conflicting payments systems facing almost any patient who visits the doctor’s office or hospital. One study in 2014 suggested that America’s extraordinarily complicated multi-payer system leads to administrative costs for billing and insurance that are five times the costs of a simplified payment system such as Canada’s.
The second is the soaring monopoly profits and sky-high salaries along the entire private supply chain, from drug manufacturers to hospitals. The drug companies use their extraordinary monopoly power, whether due to patents or FDA approvals on out-of-patent drugs, to overcharge Americans with markups that are sometimes hundreds of times the production cost of the medicines. And private providers are a highly concentrated industry in most metropolitan areas.
With the mergers and closures of hospitals during the past 20 years, driven by for-profit medicine, this market power has soared, and so too have monopoly profits and healthcare costs facing consumers.
Check out the CEO compensation of the big systems providers — $59 million for Aetna, and $44 million for Cigna in 2017 — or the salaries of the executives of the “not-for-profit” hospitals in your area, often running several million dollars per year.
For these reasons, healthcare costs in the US could be brought down by cutting three main areas: administrative costs, drug prices, and monopoly profits of private insurers, which in turn could be achieved by much lower reimbursement rates for medical services and more effective contracting. Recent studies (here and here) have shown prospective savings on national health expenditures resulting from Medicare for All would save trillions of dollars over 10 years.
Smart cost control
The Jayapal bill is smart on cost control. It would have Medicare negotiate with pharmaceutical companies to drive drug prices down, with the threat of removing the monopoly rights of patents if the drug company doesn’t reach a reasonable agreement on prices. (Technically, the government would issue a compulsory license to competitors). It would have Medicare set an annual budget with hospital providers. This annual budget would focus on healthcare provision rather than wasted time and expenses on billing. It would not permit astronomical management salaries and super-profits.
By wringing massive administrative costs, monopoly profits, and sky-high salaries out of the healthcare system, costs would be slashed, with the savings passed on to households. Remember, if the US paid the same share of income as our peer countries like Canada, the total saving would be on the order of 6% of GDP (from 18% today to around 10-12% as in the peer countries). With a GDP of around $62,000 per person in the US, 6% of GDP saving comes to a cost saving of around $3,700 per person, or around $14,800 for a family of four.
Such savings wouldn’t be achieved in full, or even in the early years. The pushback from industry against cost-cutting will be fierce. Moreover, the sheer inertia of existing costs, prices, budgets, and administrative systems cannot be doubted. But what can be said with confidence is that a well-designed MFA system would put the US on a path toward the reasonably priced healthcare systems of other comparable countries.
Moreover, MFA would allow us to rethink healthcare delivery to take into account perhaps the biggest feasible benefit in health outcomes. America’s current disease burdens often reflect unhealthy life circumstances — great stress, obesity-inducing diets, lack of exercise, drug dependence, and others. These are social ills turning into medical ills.
A fairer, more balanced, health system based on good health rather than maximum profits would turn its attention to helping Americans live healthier lives.
Getting MFA through the political process won’t be easy. The drug industry is one of America’s top lobbies and campaign contributors, befitting a massive economic sector rolling in profits. Lobbying outlays in 2018 across the health sector are estimated at around $549 million and campaign funding in the 2018 election cycle at $255 million. The industry will be ready to fight an MFA plan with guns blazing, and trot out the usual arguments: stop socialized medicine, save personal choice, don’t put yourself into the hands of government bureaucrats, don’t let American become Venezuela — you name it.
Yet Sanders and Jayapal and their many colleagues who have come on board now (including 106 co-sponsors) have the best chance to prevail in our modern history. Americans know that the healthcare system is rigged, and they will support a new system that convincingly shows the way to fair and reasonable healthcare costs.
Jeffrey Sachs is a professor and director of the Center for Sustainable Development at Columbia University.