WHAT CAN WE DO?
Just a personal note:
I believe that every citizen in the richest and most powerful nation in the history of this world is entitled to healthcare. You may not agree. You may believe that in a free-market society, the choice of whether to purchase healthcare insurance or assume the financial risk yourself is a personal decision. My thoughts in the previous note and in this one are based on my individual position that every person in this country should be protected by insurance coverage, and if they cannot afford it, it should be provided to them by the society in general.
The Insurance Marketplace
In an open marketplace, prices are controlled by competition. If one insurer offers a plan with a less expensive price tag than another, supply and demand should move consumers away from more expensive plans into less expensive ones. Unfortunately, in healthcare there are strictures on the ability to lower prices.
A company can offer you lower prices by controlling who you can see in their “provider network”. They can contract with family practices, specialty offices, hospitals and testing companies to control their costs, and pass those savings on to customers with lower premiums, but the tradeoff is a requirement to use only those providers, which means less choice for the consumer.
That strategy may result in the vertical integration of providers, with the insurance company owning the hospitals, doctors, nurses and ancillary services. The largest of these is Kaiser Permanente in California. This model can control costs, but it restricts the patient to that specific network of hospitals and doctors. Some find this acceptable; some want to be able to use whatever specialist they choose and want their insurance company to cover the cost of their choice.
Or a company can restrict what is covered by their plan. For example, they may not cover new treatments or medications for a “trial” period, labeling those treatments or medications as “experimental”, and not covered for some period of time. While other insurers need to raise their rates to cover these items, the lower-cost insurer can delay coverage and keep their prices lower. Again, the tradeoff is restricted coverage.
Or, a company can increase its copays, trading off lower monthly strategic premium costs for higher tactical assessments when claims are made.
Or it can increase its “deductible”, the amount of money the policy holder is required to pay at the beginning of the year before the insurance company begins to cover the costs. Sometimes this number may be 100% of the cost up to say $2,000; sometimes it will be 50% of the costs up to $4,000; and after that deductible is reached, the insurance company may cover 75%, 90% or 100% of the future costs. We are quite familiar with this with regards to auto insurance and home insurance, but often we seem surprised about it with health insurance. As I have pointed out before, insurance is insurance is insurance.
What about simply giving the consumer the money to purchase their own insurance?
The concept is that if the consumer were to have the money to purchase insurance, that they will shop to find the best plan for themselves and that this shopping process would put pressure on insurance companies to reduce their prices. Or, if the money is deposited into each individual’s own Medical Savings Account, they may opt to forego insurance and “self-insure”, betting that their medical costs over the year will be no greater than the amount in their account.
According to CMS (the government agency that controls Medicare and Medicaid), in 2023 (the last year for which numbers are available) American spent $4.9 Trillion on healthcare, of which $3.4 Trillion was spent directly on Insurance (Private, Medicare, and Medicaid).
This represents a spending of $14,570 per person.
And of this, around 10% was spent on pharmaceuticals.
If the government was to provide this amount to each American, how would it come up with $5 Trillion to distribute to American citizens to allow them to shop for healthcare services?
And if those funds were simply given to people with incomes of less than $200,000 per year, the amount necessary to provide these funds would be reduced to ONLY $4.5 Trillion, since 90% of Americans earn less than $200,000 per year.
Furthermore, simply allowing people to shop for coverage does not change the financial pressures for the Insurance Companies, as they still remain for-profit and are driven by market pressures.
Instead, what would most likely happen is that government would not provide the full costs of healthcare. They would provide an income-driven subsidy, something like $10,000 per year in credits to purchase insurance. Or it might place those funds in restricted Medical Savings Accounts. This amount is at least 20% lower than what would be necessary to purchase current plans, so the consumer would be forced to find lower cost plans or to absorb the difference themselves. And we have seen in the other insurance markets, that when companies offer low-cost plans, the benefits either become limited or collecting benefits becomes adversarial. Unscrupulous companies come in, offer low-cost plans, sell these plans to less educated, elderly, or vulnerable populations, collect the money and then go belly up, leaving the consumer high and dry. Agree or disagree with the ACA, it created a defined marketplace that attempted to prevent this type of insurance fraud.
There is always the greatest leverage when institutions negotiate for contracts rather than individuals.
Is there a solution?
The simple answer is “No”. Our system centers on for-profit public companies who manage our healthcare expenditures and coverage. And the addition of new treatments, diagnostic tools, and medications result in cost escalation over and above those attributable to national inflation. The free-market model assumes that if multiple companies are attempting to attract buyers for their product, that they will be motivated to provide the best product at the lowest possible price in order to acquire market share and therefore profits for their investors.
Governmental regulations at both the state and federal levels provide parameters for these products in the same way that they do for automobiles, toys, and cosmetics.
Any “solution” designed to reduce the costs of insurance (in any field of insurance), by its nature reduces some form of the coverage, or allows for increased payments in the form of deductibles and/or co-pays. Or it restricts which services can be added to coverage.
Can we take the profits from the Insurance companies and return that to the patients?
Here are some realities:
There is a metric called the MLR, the “Medical Loss Ratio”. Public healthcare insurance companies are legally restricted by this metric. For Individual and small group plans the MLR must be at least 80%, meaning that of the total monies collected from insured customers, at least 80% must be paid out for medical care, 20% is then available for administrative costs and profits. And for Large group plans, the MLR must be at least 85%.
Average administrative costs run at around 12%-15%, so there are actually less than 5% profits for these companies. The incentive for insurance companies is to reduce their administrative costs, because doing so would allow them to increase their profits, which would increase their market cap.
Compared to the average publicly traded company, a 5% net profit margin is considered low, 10% is considered healthy and 20% is considered high.
There is not a significant amount of profit available to rebate to the public after taxes. I wish that I could say that the healthcare insurance space was minting cash, but in our economic system, they are, actually, weak earners.
There are some things that can be addressed:
- We can negotiate decreased costs of equipment and medications. The current administration is pursuing pharmaceutical pricing reductions. This is a good thing for the consumer, but in general, price controls have never proven to be successful. Much like a water balloon, if you push in on one side, you get a bulge somewhere else. For-profit companies will still attempt to find a way to get a return on their R&D investment.
- We can centralize some services. There could be savings if diagnostic imaging were to be regionally centralized so that there would be no need for every Hospital to have multiple CT scanners along with the infrastructure and personnel costs of that scanner, or for every Hospital to provide robotic surgery, or for every Doctor to perform exams. Orthopedics, gynecology, and other specialties could be regionally grouped, replacing the multiple small practices with a single large integrated facility. This could create economies of scale, but with a reduction in choice and convenience.
- AI might be able to replace general examinations and alert Doctors when they need to intervene. AI telemedicine can be expected to reduce the need for office space. AI nurses might replace or augment Nurse Practitioners.
- Smart watches like the Pixel Watch and Apple Watch are incorporating more and more healthcare functions. In the very near future, they will have the ability to monitor your blood sugar, blood pressure, blood oxygen, steps, sleep patterns, stress indicators, heart rate, body temperature, ECG, falls, cholesterol levels, menstrual cycles and more. This data can be monitored by central AI facilities to alert your healthcare provider to changes in your medical condition, providing services far earlier than by periodic examinations, thereby reducing the costs of hospitalizations and serious incidents.Further, the accumulated data from large sets of individuals will create a healthcare database that will be able to identify health risks that we are currently unaware of, generating new lines of research into new treatments and diagnoses.
- Pharmacists could be given the authority to prescribe medications directly, bypassing the need for an office visit with your physician. Fewer “touches” with the patient means lower costs to the system.
- The federal government could create a funded agency to cover catastrophic events. These programs could underwrite the costs of cancer management, transplants, and other high-risk, high-cost procedures. Centralizing the risk can allow for lower negotiated pricing, and by extracting those costs from the private insurance markets, the costs of premiums to all individuals would be significantly reduced.
- We can restrict direct-to-the-consumer advertising for pharmaceuticals. This will decrease the spend for the pharma companies, allowing them to reduce their prices while maintaining their profits, and put the decision-making back in the hands of the physician, which could yield a decreased use of new high-priced medications and an increase in lower-priced established treatments.
- We can alter the patent protection for pharmaceuticals, specifically for biologics. These items currently are protected against “biosimilars”. This is a topic for a future note, but the patent system is not well constructed to deal with these types of products.
- We could legislate maximum pricing for patented medications to limit the costs to patients and thus to insurers. This may have adverse consequences in suppressing new medications due to the decreased projected ROI on their development.
“Solutions” that I believe would be destructive:
Cutting the US medical research budget. This would put a governor on the rate of innovation, slowing down the introduction of new treatments for disease, and therefore, slowing down healthcare cost inflation. It would also slow the development of cures and degrade American exceptionalism in international research. Slowing R&D slows the economy.
- Restricting the FDA’s approval of new drugs or requiring additional years of safety testing. An example of this is the current proposal to require placebo testing for all vaccines. This will result in tremendous consumer backlash over potential life-changing drugs being denied to patients in need and has the potential to result in unnecessarily increased hospitalizations from the spread of pathogens.
- Forcing small hospitals to close, centralizing care in large regional centers. This would reduce costs through economies of scale, but might require significant travel for citizens, longer wait times and additional bureaucracy. Barriers to access for care often result in decreased healthcare visits, which reduces costs, but also reduces health outcomes for patients.
- Expanding the definition of “doctor” to include individuals with limited training such as Medics, who would be “supervised” by licensed physicians, but who would be lower-salaried employees. This would reduce reimbursement costs but runs the risk of undereducated and undertrained people managing your health and missing signs of disease that would result in unnecessarily bad outcomes
- Creating additional regulations that allow insurers to restrict treatments or tests. For example, allowing insurers to restrict reimbursements for mammograms to once every 2 years, or allowing insurance companies to cover surgical procedures rather than medication treatments, or the reverse, for certain conditions (much like dental insurance may cover extraction and a bridge, but not an implant).
The bottom line is that if you add safety protection requirements to automobiles, your next car will be more expensive, over and above inflation.
Our society continues to move toward tiered benefits. If you can afford coverage for what you want, and the “basic” plan does not cover it, then you can purchase the upgraded plan. Your health outcomes could be determined by how much insurance you can afford, not by what you need to remain healthy.
To paraphrase Louis C.K.:
“The only time you should look in your neighbor’s bowl is to make sure that they have enough. You don’t look in your neighbor’s bowl to make sure you have more than them.”