How to make Health Care Less Costly

by admin on 07/20/2018 1:06 AM

Victor R. Fuchs, PhD of the Stanford Institute for Economic policy Research suggest we should begin by replacing Employment Based Insurance.

Among the most important domestic policy problems in the United States is the high cost of health care, which is estimated at $10 000 per person per year and is at least 50% more than the cost in any other country.1 The annual US total health care spending of more than $3.3 trillion dwarfs spending on other critical services such as national defense ($867 billion) and education ($1.1 trillion).

The cost of health care devastates some family budgets and lives, limits the ability of state and local governments to provide adequately for education and infrastructure, and contributes substantially to the federal government’s deficit and debt. A reduction in health care expenditures by only 10% would free $330 billion each year to meet other public and private needs. 

The most important inflationary factor in US health care spending is the rapid diffusion of expensive medical technology, including prescription drugs and devices. Some new medical technologies significantly improve health outcomes; however, many mostly just increase expenditures. Second in importance, hospital and physician groups have formed larger organizations with power to raise prices in many health care markets.2 Integration of health care organizations and clinicians may result in more effective and efficient health care; however, integration also facilitates the extraction of higher prices from insurance companies and patients.3

Employment-based insurance has been a major factor in the escalation of health care expenditures. Employment-based insurance has covered at least half the insured population, currently approximately 150 million individuals, for more than 50 years and has been the dominant force shaping the US health care system. For example, when Medicare was introduced in 1965, it closely followed the employment-based insurance model of fee-for-service payment and wide choice of physicians and hospitals.

With few exceptions, employment-based insurance is administered by health insurance companies. In consultation with employers, many of whom are self-insured, the insurance companies design benefit and premium schedules, negotiate reimbursement rates with hospitals and physicians, and approve or disapprove medical center, physician, and patient claims. There are only a few very large health insurance companies and many small ones, but none has been successful in restraining expenditures. The inability of large insurance companies to bargain more effectively with hospitals and physicians is a systemic problem.

Most health care is delivered locally and, partly as a result of mergers and acquisitions, a predominant or premier hospital and affiliated physicians in a local market may have more bargaining power than even the largest insurance company. In some markets, a large insurance company is forced to pay more than twice the Medicare fee in part to retain a popular health care system on its plan. If insurers could collaborate to present mutually agreed-upon prices, they could have more success in limiting expenditures. Such cooperation (collusion) would have to overcome many practical difficulties and would probably violate antitrust laws.

Compared with the individual insurance that it replaced, group employment-based insurance is more efficient because it decreases marketing and administrative costs and reduces the risk of adverse selection. However, compared with the health care financing systems of other high-income countries, larger marketing and administrative costs help explain why the United States spends so much more on health care. Perhaps as much as one-fourth of the expenditure gap between US health care and health care systems in other high-income countries may be spent on marketing, administration, and billing and collections rather than on patient care.4

Another important domestic policy problem in the United States is inequality in income and in access to medical care, education, and other critical services. Employment-based insurance does not help solve this problem; it exacerbates it. Coverage by employment-based insurance is highly positively correlated with income. In households with a family income level more than 400% above the federal poverty level, 83% of employees are offered employment-based insurance.5 In households with a family income level between 100% and 250% of the federal poverty level, only 38% are offered employment-based insurance.5 That employment-based insurance skims the “good” risks (low users of care) can be inferred because employment-based insurance pays only one-third of US health care expenditures even though it covers half the population.

The tax code is another means by which employment-based insurance exacerbates inequality in that contributions to health insurance are exempt from employees’ income tax. The higher the tax bracket of the employee, the bigger the subsidy, which accounts for hundreds of billions of dollars each year. Perversely, most of the tax subsidy is received by employees with above-average incomes. What can be done? One approach would be for employment-based insurance to be replaced by a more equitable and less costly system with the characteristics appearing in Box 1 as referenced in these links. . ..

How to Make US Health Care More Equitable and Less Costly? Begin by Replacing Employment-Based Insurance.

Is US Medical Care Inefficient?, an incubator in health plans that would solve the United States health care conundrum, has been incubating for 15 years. Solving the health care issues involves four very strong positions which have difficulty in negotiating with each other. The position from the Insurance Industry, the Hospital Industry, the Physician Networks, and Medical Government Complex are rather variable and incompatible with each other. This would suggest that reform must come from a disinterested party knowledgeable with the concerns of the several stakeholders. This would involve major entrepreneurial funding which may not be in tune with the several stakeholders. As noted by Dr. Fuchs, during times of war of other national stresses, at the times with significant changes can occur. After 15 years, the time is at hand and we welcome your input.

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