Our soaring US health care costs are primarily the result of egregious prices that are twice as high as in "expensive" Europe, not to speak of multiples of Asia's best providers. Other factors like excessive or unneeded care play a part of course, but are also ploys by health industry apologists to draw public attention away from the pricing issue.
Aligning US health care prices with Europe's will vastly benefit Americans and satisfy objectives of both political parties. It will solve our deficit problems without raising taxes, lower employer costs, create jobs through a more cost competitive work force, and free more public resources for education, worker training, infrastructure, and defense. Yet real reforms to correct prices are almost non-existent. Why?
It's due to various forms of the principal-agent problem that is widely studied in economics and political science. It involves situations where a body of people like the American public or companies or other entities (the principal) has to act through a representative (the agent). The agent should act in the best interests of the principal, but may instead follow a different agenda if incentives are misaligned.
The US story is one of betrayal by several types of agents, primarily those acting on behalf of the public, who are bought over or intimidated by a health industry awash in money. Understanding these agency issues can help us to identify barriers to reform as well as ways to overcome them.
Lawmakers (senators and Congressmen) are elected agents of the American people. They can fix the two biggest sources of abnormal pricing by easing provider scarcities and allowing more hospital competition. The third major source, private insurance complexity and middleman inefficiencies could be eliminated through single payer or at least a strong public option. Excessive drug prices and malpractice / regulatory burden are other contributors to high costs, and are also eminently addressable. Yet lawmakers have largely failed the public trust on all these fronts. Far from helping, in 1997 Newt Gingrich and Co. actually legislated caps on medical residencies funded by Medicare, to worsen doctor shortages and elevate prices for their services.
Moreover, the natural tendency of officials in government is to expand their departmental empire, not to shrink it. A larger payout for health care services means a bigger budget for CMS, more clout and opportunities to accord patronage, and receiving payback in return. Blandishments include lucrative post-government careers for obliging officials. GWB era CMS director Thomas Scully parleyed multi-million dollar private earning opportunities even as he was driving Medicare to pay for drugs for seniors that enriched the pharma industry.
The media has been similarly naive in relying solely on health care pundits whose allegiance to their industry trumps any objective presentation of facts and suggested solutions to runaway health costs. An example is Dr. Sanjay Gupta of CNN who speaks knowledgeably about purely medical aspects of patient care and treatment. But he served up a highly biased and distorted "fact check" on the movie "Sicko" that exposed US health industry shortcomings. Very few experts even mention the role of high US prices, leave alone core reasons for it like market power, stifled competition, artificial scarcity of providers. The few that do so seem to lose their nerve when it comes to offering up real supply side solutions (including global options) that will shrink the size of the bloated industry pie.
Among journalists there are positive developments. A handful like Ezra Klein on March 2 in the Washington Post and Todd Hixon on March 1 in Forbes are (at last) highlighting the role of overpricing while discounting some red herrings as to the causes. They should amp up their message of this problem as well as the fixes that are easier than they realize through straightforward legislative and administrative steps. That will build up popular awareness and pressure lawmakers and public officials to do right by their constituents.
If the media needs objective guidance from experts it can turn to those who don't have strong US health industry ties and yet have useful knowledge and insights to offer. They can seek health experts outside of the US, like those in the WHO or in Europe who have studied our system. Another option is US academics outside of the health industry. For example John Cochrane, a prominent professor of finance in the University of Chicago has an op-ed "What to do on the day after Obamacare" in the WSJ on April 2. Even as a strong Republican (as evident from his numerous WSJ op-eds) he talks of US health provider supply constraints, lack of competition and need for imports that no health expert has dared touch upon.
Are there agents for private payers that can counter industry influence? As I described on April 21, '11 the most potent one is the National Business Group on Health (NBGH). NBGH represents a concentrated base of almost 350 of the largest employers who cover 50 million people and pay about 10% of all US health care expenditures. This employer group has the financial clout as well as the incentive to push solutions that align US health care prices with peer economies, and NBGH is uniquely placed to channel its members' efforts. The right price corrections alone can cut a trillion dollars annually from national health expenditures of which NBGH members' collective savings of a tenth of that is a staggering sum. Of course health expenditures won't abruptly plummet that way, but rather flatten in nominal dollars as reforms take root over the next few years. That means health expenditures will decline as percent of GDP (an unimaginable scenario according to health pundits, instead of shooting up per current projections) and converge towards European levels.
But of all of NBGH's many activities and initiatives, some of which have been recognized with awards, none focuses meaningfully on prices. At least nowhere with the scope and scale in the political sphere and in shaping public opinion as an antidote to industry influence. It's as if NBGH is happily mining for silver when even larger quantities of gold are lying about untapped. NBGH achievements in furthering quality, wellness and procedural efficiencies is probably saving its members billions of dollars. Yet this very fact may lull its governing Board and management into ignoring healthcare fee anomalies whose elimination will realize for their members (and the US as a whole) savings that are orders of magnitude higher. There are several other reasons why NBGH may not be going there that can and should be surmounted. I'll cover this in a separate post.
The point is that many health reforms can drastically lower costs without compromising quality or even patient choice. But they're stymied when principals and agents (especially for public interests) have divergent agendas. A more discerning media and agents for a concentrated body of private payers like the NBGH can be key to getting public agents to solve our "real" (read price-based) health cost issues and resultant economic crisis.
Aligning US health care prices with Europe's will vastly benefit Americans and satisfy objectives of both political parties. It will solve our deficit problems without raising taxes, lower employer costs, create jobs through a more cost competitive work force, and free more public resources for education, worker training, infrastructure, and defense. Yet real reforms to correct prices are almost non-existent. Why?
It's due to various forms of the principal-agent problem that is widely studied in economics and political science. It involves situations where a body of people like the American public or companies or other entities (the principal) has to act through a representative (the agent). The agent should act in the best interests of the principal, but may instead follow a different agenda if incentives are misaligned.
The US story is one of betrayal by several types of agents, primarily those acting on behalf of the public, who are bought over or intimidated by a health industry awash in money. Understanding these agency issues can help us to identify barriers to reform as well as ways to overcome them.
Lawmakers (senators and Congressmen) are elected agents of the American people. They can fix the two biggest sources of abnormal pricing by easing provider scarcities and allowing more hospital competition. The third major source, private insurance complexity and middleman inefficiencies could be eliminated through single payer or at least a strong public option. Excessive drug prices and malpractice / regulatory burden are other contributors to high costs, and are also eminently addressable. Yet lawmakers have largely failed the public trust on all these fronts. Far from helping, in 1997 Newt Gingrich and Co. actually legislated caps on medical residencies funded by Medicare, to worsen doctor shortages and elevate prices for their services.
Moreover, the natural tendency of officials in government is to expand their departmental empire, not to shrink it. A larger payout for health care services means a bigger budget for CMS, more clout and opportunities to accord patronage, and receiving payback in return. Blandishments include lucrative post-government careers for obliging officials. GWB era CMS director Thomas Scully parleyed multi-million dollar private earning opportunities even as he was driving Medicare to pay for drugs for seniors that enriched the pharma industry.
The media has been similarly naive in relying solely on health care pundits whose allegiance to their industry trumps any objective presentation of facts and suggested solutions to runaway health costs. An example is Dr. Sanjay Gupta of CNN who speaks knowledgeably about purely medical aspects of patient care and treatment. But he served up a highly biased and distorted "fact check" on the movie "Sicko" that exposed US health industry shortcomings. Very few experts even mention the role of high US prices, leave alone core reasons for it like market power, stifled competition, artificial scarcity of providers. The few that do so seem to lose their nerve when it comes to offering up real supply side solutions (including global options) that will shrink the size of the bloated industry pie.
Among journalists there are positive developments. A handful like Ezra Klein on March 2 in the Washington Post and Todd Hixon on March 1 in Forbes are (at last) highlighting the role of overpricing while discounting some red herrings as to the causes. They should amp up their message of this problem as well as the fixes that are easier than they realize through straightforward legislative and administrative steps. That will build up popular awareness and pressure lawmakers and public officials to do right by their constituents.
If the media needs objective guidance from experts it can turn to those who don't have strong US health industry ties and yet have useful knowledge and insights to offer. They can seek health experts outside of the US, like those in the WHO or in Europe who have studied our system. Another option is US academics outside of the health industry. For example John Cochrane, a prominent professor of finance in the University of Chicago has an op-ed "What to do on the day after Obamacare" in the WSJ on April 2. Even as a strong Republican (as evident from his numerous WSJ op-eds) he talks of US health provider supply constraints, lack of competition and need for imports that no health expert has dared touch upon.
Are there agents for private payers that can counter industry influence? As I described on April 21, '11 the most potent one is the National Business Group on Health (NBGH). NBGH represents a concentrated base of almost 350 of the largest employers who cover 50 million people and pay about 10% of all US health care expenditures. This employer group has the financial clout as well as the incentive to push solutions that align US health care prices with peer economies, and NBGH is uniquely placed to channel its members' efforts. The right price corrections alone can cut a trillion dollars annually from national health expenditures of which NBGH members' collective savings of a tenth of that is a staggering sum. Of course health expenditures won't abruptly plummet that way, but rather flatten in nominal dollars as reforms take root over the next few years. That means health expenditures will decline as percent of GDP (an unimaginable scenario according to health pundits, instead of shooting up per current projections) and converge towards European levels.
But of all of NBGH's many activities and initiatives, some of which have been recognized with awards, none focuses meaningfully on prices. At least nowhere with the scope and scale in the political sphere and in shaping public opinion as an antidote to industry influence. It's as if NBGH is happily mining for silver when even larger quantities of gold are lying about untapped. NBGH achievements in furthering quality, wellness and procedural efficiencies is probably saving its members billions of dollars. Yet this very fact may lull its governing Board and management into ignoring healthcare fee anomalies whose elimination will realize for their members (and the US as a whole) savings that are orders of magnitude higher. There are several other reasons why NBGH may not be going there that can and should be surmounted. I'll cover this in a separate post.
The point is that many health reforms can drastically lower costs without compromising quality or even patient choice. But they're stymied when principals and agents (especially for public interests) have divergent agendas. A more discerning media and agents for a concentrated body of private payers like the NBGH can be key to getting public agents to solve our "real" (read price-based) health cost issues and resultant economic crisis.
