Can the Free Market Rein in U.S. Health Care Costs? Part 3: Someone's Got to Pay

Avoiding the pitfalls of socialized care while ensuring access to all is a tricky business.

It’s fun to bandy ideas about. Figuring out how to pay for them, less so. In this final installment of my series on health care reform in the U.S., I’ll take a stab at the hard part: payments.

First of all, let’s review some core principles, as they might be easier to agree upon than how to finance the whole thing.

1) Demand price transparency in health care: one product or service, one price, for all payers. This is not only fair, and consistent with most every other aspect of our economic system (maybe not American Airlines, but your local restaurant, plumber, private school, and shoe store follow this principle), but also the easiest way to save money, as well as remove pharmacy benefit managers and the people who make up hospital chargemaster lists from the payroll.

2) Encourage price shopping by both doctors and patients. Listing actual prices is the first step in this process. Incorporating them into the EHRs doctors use, so that their recommendations about where to seek medical services can include cost, and making them easily accessible to health care consumers, are the next steps. I discussed principles #1 and #2 in my first post on the subject.

3) Require participation in a catastrophic insurance plan for everyone. By restoring health insurance to actual insurance (instead of an elaborate prepaid health cost sharing plan), costs can be low, essential care can be afforded, and unwanted outcomes reduced (ie, medical bankruptcies and unpaid large hospital bills).

4) Unlink employment from health care cost sharing. This almost uniquely American reliance on employers to finance health care costs creates terrible inefficiencies and irrational decision making on the part of employers and employees both. My second post focused on these last two concepts.

5) Increase access to routine and emergent care. Access to health care is a key aspect to health, and a healthier country is good for everyone.

6) Create a payment system that simplifies the reimbursement process, reduces the inefficiencies of the current system, and creates pressure towards cost containment. This post has the thankless task of addressing points 5 and 6.

I will begin by saying that not everyone thinks that access to health care should be a right. However, most people in this country share that belief:

For those who prefer stories to tables, if your neighbor gets laid off from their job, loses their health insurance, cannot afford to buy insurance on the market, and gets diagnosed with colon cancer the next month — are you okay with them slowly dying of their cancer because they could not afford treatment? I am aware that my libertarian readers will point out that said neighbor could petition their church for help, or start a GoFundMe campaign, but I will remind my readers that a) the required couple hundred grand is big time church money; and b) I am ignorant of the example in history where charity has worked really well at providing universal access to health care.

Now, the flip side to this would be the survey question no one bothers to ask: does everyone have the right to platinum-level health care, with a $500/month concierge doctor and fully-covered IV fluids for every nasty hang-over? I imagine roughly 0% of respondents would answer in the affirmative.

Tension arises between these two points. If universal access to at least a basic level of quality health care is deemed a right, not everyone can afford this right, so in that place known as the Real World, an entity larger than the individual sometimes will have to pay. If we boot out the insurance companies and employers from the options in the effort to eliminate our current pre-paid health care from masquerading as a health insurance plan, that leaves the government as payer of last resort. The government, of course, is a problematic payer for a series asking, “Can the Free Market Rein in U.S. Health Care Costs?”

It’s a fine question to ponder, whether and how the government could support those who could not afford their routine health care, or even premiums on catastrophic care insurance, without destroying the price- and quality-modulating features of free market forces.

A conversation I had with lawyer/podcaster, Steve Spierer, served to motivate me to finally write this series. In it, he broached his idea of employing a voucher system to allow a sort of “health savings account for all” approach to financing a market-driven medical system, with the incentive to be frugal deriving from the ability to convert a proportion of unspent funds to cash after some time has elapsed. The problem with vouchers in health care, however, is the massive range of expenses. Controversial as vouchers can be in settings like school choice and food programs, at least in those examples there is a fairly finite range of what can be perceived as a reasonable price for a basic standard. A private school won’t charge $150,000 for a year’s tuition, nor will a market sell a gallon of milk for $20. However, a year’s typical medical care — without any unforeseen emergencies — can vary by orders of magnitude even in similar patients.

For example, a 70-year-old with psoriasis, high cholesterol and elevated blood pressure who had a heart attack ten years ago but is doing well now, might have annual costs of $120 for their standard of care medications (let’s say generic atorvastatin, losartan, and the steroid cream, triamcinalone), $80 for annual labs, and four doctor’s visits to manage their blood pressure and other concerns for another $500. However, say that patient had a mediocre response to their atorvastatin and was put on the injectable cholesterol medication, Repatha/evolocumab to the tune of $550 per month — an increase from $700/year to $7300/year. Now let’s conjecture that their psoriasis worsened and topical creams could not control it; a dermatology referral and follow-up visits might tack on another $1000 to the bill given the higher charges of specialty care, and if the dermatologist decides that the every three month injectable Stelara/ustekinumab is the drug of choice, add another $24,500 per annum to their medical expenses, for a new yearly total of $32,800, almost fifty times our original example!

We can’t afford to give every 70-year-old with psoriasis, hypertension, and high cholesterol a voucher for $33,000 in routine outpatient medical care every year; by comparison, Medicare spends on average about $15,000 per beneficiary (the median costs is presumably well lower) and that includes hospital care, which is about a third of total spending. $700 would be fantastically affordable, but a massive undershoot for those needing frequent specialist visits and expensive medications. I don’t there is a magic number which could just “work” here in something as gloriously simple as a voucher plan.

I’d much rather individuals simply pay for their own health care with their own money. This cuts out many of the middlemen who bloat our current system, from hospital billing clerks (the Duke University hospital system was claimed to have 1600 billing clerks for its 1000 beds!) to insurance company bean counters to government bureaucrats. Coupled with transparent prices, converting patients into health care consumers ought put downward pressure on health care prices. However, I keep coming back to that statistic I cited in each of the first two parts of this series, that 60% of American families cannot afford an unexpected $1000 expense. Health care is expensive. Many, if not most, Americans are not in the financial position to front their medical bills.

We’re caught between a rock (not wanting people to die without getting health care they cannot afford) and a hard place (being unable to write a blank check to pay for whatever medical providers want to charge). The rhetorical charge of this series, “Can the Free Market Rein in U.S. Health Care Costs?”, can only be answered with a partial “Yes.”

I think it’s important for cost containment to maximize the leverage of free market forces like price competition and consumers voting with their pocket books, especially once the flow of information to doctors and patients is improved. However, if the government is to pay for the medical care which cannot be afforded in this country, there have to be limits, and a hard annual per person cap would leave those in need of more expensive care liable to have to go without.

Here is what I propose:

Everyone is required to obtain inexpensive catastrophic insurance on the private market; those with very low income or high premiums due to advanced age and/or pre-existing conditions receive tax credits or direct payment from the government to their insurer of choice. Such insurance is not for routine/anticipated costs, like medications or treatments for pre-existing conditions; it’s for emergencies and unexpected complications of known chronic diseases. Yes, older people in poor health will have higher premiums than young, healthy people, but with a huge pool to share risk, and the majority requiring no pay-outs in a typical year, costs will be low.

With unexpected care needs covered, everyone also has the option to request government aid for their routine health care costs. Let’s call it, “the Medicare fund.” Income and/or wealth testing will determine the annual expense cut-off at which Medicare fund support kicks in. For example, someone below the poverty line would qualify for full (or nearly full) coverage of all expenses. Public servants might only have to contribute the first $1000 of health care costs and 10% of future expenses to an annual maximum of $2500. A seasoned primary care physician or 22-year-old Google software engineer could have a $20,000 initial annual payment, then 20% of additional costs to a maximum of $30,000 per annum.

Those seeking government aid will be given a card, which can be used like a credit card at time of service. Government monies allocated to this (massive) Medicare fund will be delivered to providers promptly. Those patients who qualify for government payments (i.e., are beyond their required payment threshold) will still have the option to pay with their own funds, which would bring a modest discount, to encourage private payments; they would be later reimbursed via tax credit or direct payment.

The government will set a limit on what it will spend on each medical service; if a provider charges beyond that limit, the patient can either pay the difference or find a less expensive provider. Ugh. This is really “The Catch” to the whole thing — there has to be a form of price limitation for government expenditures, or service providers are too incentivized to charge outrageous prices aimed at the many government-supported consumers. (My dear libertarian readers, please stop nodding your heads sarcastically - it’s really annoying me.) This is neither a radical nor horribly complex process, however; Medicare already essentially does this with its reimbursements for every possible service code under the sun. Much like Medicare, cut-offs would probably best be adjusted by zip code. The Beacon-on-the-Hill for lovers of price transparency, the Oklahoma Surgery Center, would have a lower cap than a Manhattan surgeon, given that they pay less in rent, wages, and basketball season tickets. Current Medicare rates constitute something like a living wage for most physicians (sometimes more, like the $600 per 20 minute cataract procedure ophthalmologists rake in). Since around 90% of physicians accept Medicare, and almost 40% of medical expenditures run through it, it’s not some strange new world to imagine government-established price limits on a substantial proportion of medical income.

OK, that’s rather a lot. To respond to your inevitable objections:

Why keep those vultures known as “private insurance firms” around? I think private insurance has made a mess of routine health care, for reasons I have stated elsewhere. However, they can fill the niche for genuine insurance for unforeseen expensive health events rather efficiently, and, by pooling large numbers of customers, can represent the health care consumer with more leverage than individuals, who hardly can efficiently shop for care in times of medical emergency. It would also help to repeal the ill-advised “80/20 rule,” which is a great example of how a government regulation seeking to save money can create a situation in which the only way for a insurance company to make more money is to charge more and spend more!

This will create a massive bureaucracy that will make the IRS look meek by comparison, tasked with grading all our health risks! No, I am claiming a deus ex machina here: while not the hugest fan of AI/machine learning in clinical medicine, I am totally sold on its ability to do as well or better as a mid-level insurance company or Medicare bureaucrat at counting medical beans. This could honestly probably be done well enough with old fashioned software running regression models. In the time it would take to implement changes of this scope, having excellent AI-laced tools to make these determinations should be the least of the challenges.

Big Brother is going to be watching over your health care. News flash: he already is. And if you don’t want government AI programs scanning car dealership records to find out you somehow bought a 2022 Tesla Model X despite your taxes showing that your art gallery only cleared $20,000 last year… you are free to shop for your own catastrophic care insurance in the private market, pay for your own premiums and health care costs, and avoid the governmental program entirely.

People are going to game this system. Yes, people will try to understate their incomes to get sweeter deals from the government; this has been happening since the advent of Medicaid, and all the more common with its expansion and now the ACA marketplace. And patients will lobby providers to consider routine expenses emergent, or emergent expenses routine, depending on which plan is more financially favorable for them at the moment. However, technology has made it easier to detect fraudulent behavior, and substantial penalties will deter most patients and physicians from breaking with the intent of the programs. Every system has grift; it’s a matter of limiting its impact.

You can’t take away Medicare!!! Shhhhh, I said we are still calling it “Medicare,” just the “Medicare fund.” Seniors are already paying for Medicare based on income thresholds; this would be a familiar concept. For those caught on fairness — namely, that we should expect to get back out what we put in to Medicare via our payroll taxes — people can spread out their payments into the system against the money they would otherwise have been expected to pay for their health care. In the long term, though, we probably need to disassociate these payroll taxes from an expectation that we “pay in and we get out” when it comes to Medicare; demographic trends have turned that into a fantasy.

How do we finance this massive shift of payments from business-based insurance to a government-based fund? A payroll tax would be the least disruptive means in the short term to pay for a system like this, as businesses would be the ones getting the free ride once they were sidelined from providing insurance for workers. However, in the long term, you can make the case for payroll taxes, excise taxes, or income taxes — or all three at once, as California’s failed 2022 Assembly Bill 1400 proposed in order to finance a single payer system. A major new tax load is a bitter pill to swallow for anyone hoping to break up the current cartel of employer-financed private insurances, but I still hold to the promise of net cost savings and a more efficient system.

The government price will end up the de facto price for all services, losing any benefit of market forces. I understand this concern, but I’m not sure it’s wholly valid. We already live in a country with a motley hybrid of medical service providers accepting either cash-pay only, private insurance or cash-pay, Medicare or private insurance but not cash-pay, and so on. Sometimes the cash-pay providers (like me) charge more than Medicare rates, sometimes less (like the Oklahoma Surgery Center); many private insurances reimburse more than Medicare, some the same, some less; most labs and imaging centers offer a substantially lower rate to those not using insurance of any sort. In other words — having a cap on what the government will reimburse does not mean that all market forces will push inexorably towards that price point, despite the awkward tinkering with free market forces.

Even worse, small market monopoly health systems or colluding oligopolies will set prices well over the government caps, leaving those without means no affordable options. I worry about this, especially away from larger cities. A remote town of 50,000 probably can’t support two hospitals; if the existing player charges 50% over the price limits on the Medicare fund spending, there’s still not enough incentive for another hospital system to open a satellite there. But would that happen? Consumers of elective health services in their system as well as private insurance companies deciding whether or not to cover their services in their plans would both have some leverage over their pricing. Transparent price disclosures would make them an easy target for shame campaigns. Some people will drive five hours to save thousands of dollars, or fly to a city with nearby family, and hospitals usually have to stay near capacity to turn a profit. I don’t know how this turns out; but I’m not sure it can turn out much worse than what we’ve got now.

That’s really it in a nutshell. Our current system is so bad — so inefficient, bloated, underperforming, and plain expensive — that while we drift towards eventual financial implosion, it’s mad to not consider an overhaul.

In my own fantasy land, if a state could make a deal with the federal government to trial a system like this, or the whole US of A bought in, could a system like this go terribly awry, with collusion, rising instead of falling costs, failing hospital systems, etc.? Absolutely! But that’s our current path, anyway, one with hardly any hope for improvement.

If establishing transparent pricing, ridding the country of sickness funds pretending to be insurance plans, and shifting the payer responsibility to individuals with needs-based government support, failed utterly…

It would still have improved the backbone of our flailing system, and made it easier to take the next, and probably only other, step possible, to a single-payer program entirely divorced from the free market forces which do a better job of connecting consumer to service than any other system imaginable.

I understand the appeal of the single payer system; I really do. Get rid of the complexity of so many layers of payers, ensure access for all (at least financially), and have a high probability of controlling prices with a single, fully-leveraged negotiator (the federal government). However, I see the downsides, too, in the many nations running this system: with no opportunity for service providers to determine their own prices, the incentive to innovate, to provide extraordinary service, to meet the needs of the consumer, fall flat.

In the big picture, most U.S. citizens are either attached to the current hodge podge of a system, or ready for a single payer, “Medicare for all” program. I get it — when our listing ship sinks, Bernie Sanders probably wins this one. I just don’t think we should go down without striving for something better.