Rising Costs Are A Serious Detriment To U.S. Health System

The two most egregious Problems with health care in the United States are the lack of insurance coverage for all citizens and the enormous growth of the cost of health care. Obamacare helped with the first problem (but did not completely solve it), but Republican efforts have actually started to make it worse. Neither Obamacare nor the Republicans have done anything to address the second problem (rising cost of health care).

The Josh Bivins of the Economic Policy Institute (EPI) has written an excellent article about the enormous and growing cost of health care in the United States, and some suggestions on how to control it. It is a lengthy article (but well worth your time), so I include only a part of it below.

Rapid growth in the cost of U.S. health care has put sustained downward pressure on wages and incomes. This rapid growth of spending has not purchased notably high-quality care, however. U.S. spending on health care is higher than in peer countries, while quality is lower. These high costs cannot be attributed to overuse of health care in America; instead, it is clear that the high price of health care is the culprit. Prices for pharmaceuticals, physician salaries, and medical procedures are almost uniformly higher in the U.S. than in peer countries—sometimes staggeringly so.

Why it matters: Rising premiums, out-of-pocket costs, and public health spending are crowding out income gains and spending on other goods and services. Meanwhile, our health care system ranks low on measures of equity and quality relative to peer countries. Recognizing the role of health care prices in driving health spending is crucial: Efforts to contain costs by controlling use are not only economically inefficient but also dangerous—leading to decreases in medically indicated and preventive care that would improve health outcomes for Americans and that is more cost efficient in the long run.

Key findings

• Premium prices in the employer-sponsored insurance system have risen rapidly over the past two decades. The total cost of a family ESI plan rose from $5,791 to $18,142 between 1999 and 2016.6 As a share of average annual earnings for the bottom 90 percent of the workforce, these premium costs rose from 25.6 to 51.7 percent over that same period.

• Fast premium growth did not purchase better protection from health care cost growth for workers. Out-of-pocket costs rose faster between 2006 and 2016 than total costs or costs paid by insurers did. Out-of-pocket costs rose 53.5 percent cumulatively over that time, while total costs rose 49.2 percent and costs paid by insurers rose 48.5 percent.

• The rapid growth in health care costs has led to a rapid increase in total health spending as a share of GDP. This measure has risen from 5.2 percent of U.S. GDP in 1963 to 8.4 percent in 1979 to 17.4 percent in 2016.

• Among industrialized nations, the U.S. has the highest health care costs and below average quality and utilization. When comparing the American health system with the health systems of advanced economy peer countries, American health care spending and prices are by far the highest, while utilization—the volume of health goods and services being consumed—and measures of quality are decidedly below average.

• Policymakers need to focus on controlling prices, not utilization. The weight of the empirical evidence in this report indicates clearly that policies to “bend the health care cost curve” should focus on efforts to control prices, not use. The common root in strategies to contain prices in the health care sector is the need to bring countervailing market power to bear against monopoly-like pricing power currently wielded by health care providers.

• Policy focusing on utilization leads to inefficiency. To date, most efforts to control use of health care services have been poorly tailored because they focus simply on “cost sharing”—or raising the cost of receiving health care across the board. Raising the marginal cost of health in this way does reduce utilization, but patients do not cut back only on low-value care. They also cut back on medically indicated care that could actually be cost-saving in the long run.

• Meaningful policy to address pricing includes public negotiation of “all-payer rates.” The most straightforward way to provide countervailing force against the pricing power of health care providers, as well as to make health care prices informative to consumers, is more robust public negotiation of prices and the extension of this public-sector pricing power to all payers. For example, policymakers should strongly consider setting caps on rates as a tool to slow growth and provide greater transparency and accountability to consumers.

These findings underscore the depth of the challenges that remain to making our health care system more equitable and efficient. They also provide a clear series of steps that policymakers can take to improve this situation. These steps can be part of the groundwork for a more fundamental transformation of the American health system but would also ensure that the current pillar of this system—ESI—will remain strong as new reforms are made.

What can be done about it: Policymakers need to focus on controlling health care prices, not restricting use. While much attention has understandably focused on the ambitious vision of adopting a “single-payer” or “Medicare-for-all” plan, there are steps policymakers could adopt in the nearer term that would allow many of the virtues of single-payer to be realized more quickly and that could serve as useful stepping stones to even more ambitious reform:

• Extend already existing public plans and incorporate a “public option” into ACA exchanges.
• Adopt “all-payer rates”—mandating that the same prices apply regardless of who is paying—to allow private insurers to benefit from the bargaining power of Medicare.
• Pursue policies that would diminish the intellectual property rights monopolies of key health care sectors, like pharmaceutical companies.
• Increase antitrust scrutiny of consolidation of hospitals and physician networks.