The Moral and Financial Catastrophe of our Health Cartel

(Written in July of 2018 as an introduction to Tim Faust for his talk to the North Texas DSA on Health Justice.)

However you look at it, the US healthcare system is an unsustainable, unjustifiable mess.

 1.     Spending and Access

 I like to think of the U.S. healthcare system as a case study in U.S. Exceptionalism. If you take one thing from this piece, remember this central fact: Despite being by far the most expensive in the world, the U.S. healthcare system is also by far the least accessible and poorest performing among wealthy nations.

First, our healthcare system is extraordinarily expensive. We spend 18%, just shy of 1/5 of our entire Gross Domestic Product, or just shy of $10,000/person/year on healthcare. To see just how out of line that figure is, we need to make comparisons with our developed peer nations, usually members of the OECD—the Organization of Economic Cooperation and Development. We spend a little over two and a half times the average of the 36 OECD nations.

Now, this might be unfair. After all, we don’t want to compare ourselves with Turkey or Latvia, or God forbid, Mexico. So let’s give ourselves a break and just focus on the 18 most expensive systems in the world.

That’s a little better—the US only spends about twice as much as the other nations…but notice that we’re so far out of line that our mere presence in the graph has pulled the average up so high that only the four most expensive healthcare systems in the world exceed it. But now let’s add context. This is a breakdown of the public and private components of health spending in those same nations.

We might well speak of two U.S. healthcare systems: one private and one public. Each, taken individually, costs more than the average total cost of the other systems. Perhaps most astonishingly, our private, non-governmental expenditure on healthcare is over four-times the average of the other countries.

 

Why does it cost so much? A popular (though not terribly helpful answer) comes from the health economist Uwe Reinhardt: “It’s the Prices, Stupid!”

 

And a large study published in March bears that out. So, U.S. general practitioners take home almost twice the average of 10 other high-income countries.

 

And we shell out $1,443.00 per person per year on drugs, over twice the average of the other countries.

We can add to that tally unreasonably high administrative costs. The average administrative costs of other ten richest national health systems is about 2%. Here, it’s calculated at 8% (though that’s almost certainly an extreme undercount, for reasons explored below).

 

What explains these sky-high prices? Here are some explanations that the Harvard study knocks down.

 

#1: We just use more healthcare services than other wealthy countries.

Fact: We have lower rates of doctor visits and fewer days on average spent in hospitals.

 #2: We have too many specialists and not enough generalists.

Fact: The ratio of primary care doctors to specialists here is about average among wealthy nations.

 #3:  We spend too much on inpatient hospital care.

Fact: Only about 19% of our costs are from inpatient care. This is one of the lowest usage rates.

Every other nation in our comparison has universal or near-universal coverage, by which I mean that rates of uninsured are typically under 1%. The rate of uninsured adults here, by contrast, is about 13%. And sadly, that’s a large improvement over just five years ago, when a full 18%, almost a fifth of U.S. adults went without any coverage.

And what about health outcomes? Well, let’s look at two typical indices of population health. First, life-expectancy. Despite those high prices, we fall at the bottom of the heap, with life expectancies about two standard deviations below the norm among wealthy nations.

Second, infant mortality. Again, we’re at the bottom, with about twice the average rates of infant mortality among OECD nations.

Maybe most revealingly, we far outpace our peer nations in what’s called “mortality amenable to health care”—that is, deaths that could have been avoided by medical intervention. In the largest study yet compiled, the U.S. ranked 35^th out of 195 countries and territories, despite our outsized expenditures.

2.     Through the Looking Glass

Now we need to venture through the looking glass. Because while the numbers prove the fact of high prices, they do nothing to illuminate the structural forces that drive those costs. Here, as in so many other areas, there is a virtual policy consensus among mainstream Democrats and Republicans that what we really need are market-based, consumer-driven solutions. Republicans have consistently framed healthcare as a free-market issue, to which more competition is the key. As with many mainstream policy proposals, the best way to defeat it is to try to take it seriously.

In macroeconomics, competition is usually thought of as the natural antithesis to monopoly power. And in the U.S., federal anti-trust law was designed to prevent economic monopolies. BUT…the 1945 McCarran-Ferguson Act largely exempted insurance from federal regulation, including anti-trust laws. And although the insurance industry has outgrown state-level regulation, private health insurance monopolies remain perfectly legal.

It’s even more useful, though, to consider what economists call the five elements of perfect competition. In a perfectly competitive market:

1. All firms sell an identical product (the product is a "commodity" or "homogeneous");
2. Firms can’t influence market prices;
3. Market share has no influence on price;
4. Buyers have complete or "perfect" information – in the past, present and future – about the product being sold and the prices charged by each firm, and are perfectly rational;
5. Firms and laborers can move freely into and out of the market.

 

Right off the bat, I hope you’re struck by a big question: Which market are we talking about? Health insurance is one kind of market, but of course, the market conditions vary by state and locale as well as by general type. Health services, similarly, make up a huge basket of very different goods. But let’s look at the elements:

 

1.     Identical product? Obviously not! Although the ACA did manage to push out some of the most predatory insurance policies—with monstrously high deductibles and trash coverage, they left intact a byzantine system of broadly tiered services. Anybody who’s spent any time surfing the individual market sites knows that the premiums, deductibles, co-pays, and the scope of available insurance policies all differ very widely, even with the essential services outlined in the ACA. Of course, that product diversity pales in comparison to the variety of medical providers and services that you might need.

2.     Firms can’t influence prices? Another groaner. What most industries call “price fixing” is in fact common practice in medicine. Medical specialists appointed by the AMA actually work with the government to set national benchmark pricing for medical procedures. In a gift from the acronym gods, the RUC—short for AMA/Specialty Society RVS (Relative Value Scale) Update Committee—sets prices, and we the people get RUC’d. Meanwhile, the actual reimbursement rates for services in the private market are usually negotiated between doctors and insurance companies. Firms are about the only medium of price control. Actual medical consumers have no voice, unless they bargain for fees due under their deductible or get hit with the miracle of balance billing—a practice outlawed in most other countries, where providers bill patients directly for unreimbursed fees.

3.     Does market share influence price? Yet another groaner. Obviously, larger firms affect price. We’re talking not only about insurers, hospitals, doctors, and drug companies, but Managed Care Organizations or MCO’s, as well as huge lobbying organizations at both federal and state levels. And to be fair, there’s a decent logic to this any way you look at it. If you’re a provider, you typically increase profits by inflating volume of fixed-price goods. And if you’re an insurer, your whole industry works by risk pooling. That means pooling funds from diverse pockets, healthy and sick alike, to pay out costs of care for the sick. The bigger the pool of healthy patients, the more money to cover the costs. But profit seeking raises administrative costs. Insurers constantly negotiate and manage claims, but also compete in the world of advertising and finance. To limit that, the ACA put in place so-called medical loss ratios, which legally mandate that private insurers use at least 80% of their premiums to cover medical services, but that still means that they can pocket the remaining 20%. Meanwhile, the administrative costs of private insurance dwarves that of government programs like Medicare, which spends less than 2% of its budget on administration. Fun fact: The private medical insurance industry employs around twice as many people as the number of active physicians in the U.S.

4.     Perfectly-informed buyers? This one’s my favorite. Because here, we face situations in which we often exercise no meaningful choice, where our health and very life may be at stake, and where illness and infirmity often leave us extremely vulnerable in every possible way. Add to all that a systemic, inescapable knowledge asymmetry. Because here, unlike most ordinary purchases, we step off into a world of almost complete information opacity, where we often literally have no clue how or even where to begin our own treatment process. Because we aren’t—and shouldn’t have to be—medical specialists. Because we aren’t—and shouldn’t have to be—hospital administrators or billing coders. Because we aren’t—and shouldn’t have to be—drug specialists, or medical underwriters, or actuaries. We shouldn’t have to check in advance to see whether the nearest hospital accepts our insurance, or whether the ambulance ride there is going to drive us into bankruptcy, or whether the hospital only contracts with that lab or that specialist so those services aren’t covered. But, too often, we do find all that out, usually after it’s much too late to do anything about it. And of course, it gets worse, because even if we try to do our best due diligence, it’s simply often impossible to determine in advance what any given service is going to wind up costing. Medical service providers are habitually opaque about the costs of their services, which vary from policy to policy, and which are often radically and arbitrarily overpriced on the “chargemaster,” the nasty little device where hospitals charge many orders of magnitude their costs for typical products. And another bit of useful trivia: The private health insurance industry employs twice as many people as the number of practicing physicians in the U.S.

5.     Costless market entry? Another laugh-line. We—quite rightly—require a ton of education and training for entry into the healthcare field. Doctors go to school at tremendous personal costs, often for over a decade, before they’re finally licensed as full-fledged physicians. Insurers must meet very high regulatory burdens and face dauntingly high costs of capital entry and required cash reserves. Nurses of all types regularly go to school for years. Even comparably low-level billing coders require specialized degrees. In our increasingly regulated environment, the mass of administrative specialists is constantly growing. So the bottom line is that there are huge costs—for firms and their laborers—to enter or exit the market.

 

Over and above all that, our medical system is filled with what economists call perverse incentives. Doctors are supposed to advocate for their patients, but they’re also profit-seekers who make money by ordering more expensive services. Insurers are supposed to fund our costs of care, but they are profit-seekers who earn more money by (1) charging the neediest patients more—often drastically more; (2) by policing their clientele, cherry-picking from a comparably healthy workforce and pushing the chronically-ill over to the public system, and when those mechanisms don’t work, by (3) simply denying claims outright.

 

Everyone is probably at least vaguely aware of the three-legged stool of Obamacare. The main mechanism was to inject public money into the private health insurance market. Prior to that, though, our system was already shot-through with public subsidies, making for another great case of American Exceptionalism: converting public funds to private profits.

 

For example, businesses get to write off their health-coverage expenditures as employee compensation, but those gains are exempt from payroll and income taxes, to the tune of about $250B a year. By comparison, the entire Medicare program cost $581B in 2016; all of Medicaid cost $349B, and the cost of ACA Medicaid expansion totaled $70B.

 

There are other gems: The Bayh-Dole Act of 1980 granted universities—and their professors—the right to patent inventions made possible by research funded by the NIH. This opened a revolving door between medical equipment and drug manufacturers (the so-called biotechnology sector) and public universities, essentially privatizing the profits of publicly-funded research. This act of public largesse has enabled major drug manufacturers to divert private funds from basic drug research. Now the great majority of corporate R&D funding goes toward tweaking the formulas for existing drugs to bring a new product—and crucially, a new patent—to market. The bonanza was also helped along by 1984’s Hatch-Waxman Act, which started as an attempt to speed generic medication to the market, but ended up serving as a gift to big pharma by lengthening the time of manufacturing exclusivity under both FDA regulations and U.S. patent law. Perhaps most brazenly of all, the 2004 Medicare Part D drug expansion explicitly barred the federal government from bargaining with drug companies for cheaper prices.

3. The Cartel

So, our healthcare system isn’t so much a “system” as it is a loose coalition of differently-motivated, differently-responsive, and differently-regulated monopolistic industries. The big four are easy to make out: insurers, doctors, hospitals, and drug companies. Each of these industries are in tension, and all of them are profit-seeking. But there are also huge supporting players: The government, through the CMS, the VA, the NIH and CDC, and a host of other funding sources. And, in fact, the entire system of public and private universities that cater to the demands of these institutions, each with its own lobbying powers and associated special interests.

 

But you might have noticed, even with this large cast, there’s something very important that I’ve left out. Any guesses? Patients!

 

Although we describe it as a system, I prefer to think of healthcare in the U.S. more as a cartel. As the trusty Wikipedia defines it, a cartel is “a group of apparently independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices.”

 

The language that we use to talk about healthcare is littered with words like “consumer” and “literacy” and “consumption”. Whether conscious or not, this framing obscures the real (different) industrial forces constantly ratcheting-up the costs of healthcare.

Which brings me to my final thought. This is all a recognizable feature of the neoliberal state.

 “Neoliberalism” is just a convenient term to describe a kind of ideology. An ideology is essentially a value sorting device that performs several core functions. In particular, it privileges and vests authority in certain actors over others; it assigns a hierarchical priority to different, often conflicting values and goals; it polices the boundaries of respectable action and expression, and (most importantly!) it helps restrict the domain of plausibility. That is, it attempts to eliminate certain alternatives, usually simply by omitting them from the discussion, or when that’s not possible, dismissing them as implausible or unfeasible.

 As the name suggests, neoliberalism is a refinement of classical liberalism. Classical liberalism emphasized freedom of contract, and praised the minimal, night-watchman state. Neoliberalism, in turn, involves advocating market-based approaches to core political problems. As legal researchers Grewal and Purdy put it:

 Neoliberal claims advance the market side of [the] contest in capitalist democracies between capitalist imperatives and democratic demands. The contest is persistent because of pressures that capitalist markets make on the legal and political order—pressures not just for familiar protections of property and contract, but also for a favorable return on investment and managerial authority (“freedom to manage”).”

In this worldview, market forces are primary, while government regulations are secondary, and only justified to correct obvious market failures. Now, if you squint really hard, you can sort of see how policy wonks managed to get us into this bizarre mess. If you see the healthcare market as a natural phenomenon, like rain, and regulation as a necessary corrective to the occasional flood, then you can sort of see how selectively regulating and subsidizing the loose coalition of industries might be workable. But of course, this gets everything wrong. Markets, like the contract rights that underpin them, are entirely creatures of law and legal relations. The sole difference between a promise and a contract, recall, is that one is legally binding, meaning that it is enforceable through the coercive power of the state. In addition, political power predominates over all markets. If it didn’t, it would simply make no sense for the various players in the healthcare sector to spend as much as they continuously do on lobbying efforts. In the neoliberal ideology, the government is portrayed as an unfortunate but necessary evil. In reality, the government is both the payer and subsidizer of first resort as well as the enforcer of contractual debt obligations, those same obligations that, in the healthcare sector, fuel over 60% of all personal bankruptcies in the U.S.

Now socialists can pretty easily recognize this. It’s just another iteration of capitalism: The systematic prioritization of the specific, concentrated economic interests of the capital class over the obviously more fundamental and universal, but consequently more diffuse, health and welfare interests of the public.

I won’t sugar-coat it: The government, with its assorted regulatory agencies, is largely captured by the very industries it is responsible for regulating. Thankfully, it doesn’t have to be that way. But crucially, the only corrective to a monopolistic cartel is a stronger regulatory force. And in our system of government, the chief mechanism capable of creating that force requires us to articulate and advocate a vision of that reform, to build coalitions, and ultimately, to both become and vote for the people who will create that regulatory framework, finally serving as the advocates whom we, the people, we, the patients, so sorely need. We know what needs to be done. Our peer industrialized nations have done it. We need merely find the political will to do the right thing.