As our lawmakers on Capitol Hill consider a repeal and replacement of the Affordable Care Act (ACA, or Obamacare), we have seen media reports on the projected adverse impacts of the proposed replacement plan. We have heard President Trump declare, on more than one occasion, that Obamacare is a disaster, and that the replacement plan will make affordable health insurance coverage available to all Americans. Meanwhile, the Congressional Budget Office has projected that, in less than a decade, 24 million fewer Americans would be covered under the new plan than under ACA. What on earth is going on here? A look at the math of (1) health care services and (2) health insurance may provide some answers.
In February 2013, Time magazine published a piece by Steven Brill titled, “Bitter Pill: Why Medical Bills Are Killing Us.” (It can be found online.) The piece is a rather long read, and it provides a stunning look at the forces driving up the costs of medical services. Prominently featured among those forces are hospital profits.
Brill begins with a discussion of the hospital “chargemaster” – an internal document that assigns prices to all goods and services provided at that hospital:
The chargemaster, I learned, is every hospital’s internal price list. Decades ago it was a document the size of a phone book; now it’s a massive computer file, thousands of items long, maintained by every hospital . . . It would seem to be an important document. However, I quickly found that although every hospital has a chargemaster, officials treat it as if it were an eccentric uncle living in the attic. Whenever I asked, they deflected all conversation away from it. They even argued that it is irrelevant. I soon found that they have good reason to hope that outsiders pay no attention to the chargemaster or the process that produces it. For there seems to be no process, no rationale, behind the core document that is the basis for hundreds of billions of dollars in health care bills.
If you have looked at a bill from a health care provider recently, and the services reflected on the bill were covered by health insurance, you undoubtedly noticed several “adjustments” on the bill. Your insurer likely paid a fee lower than the “list price” for the care that was provided. Perhaps the bill noted an “amount non-billable” or a contractual adjustment. In other words, the service provider, whether it is a hospital, physician or lab, has agreed to accept a “discounted” fee for each specific service. The obvious benefit to the service provider is that fees are reliably and timely paid, and there is no expenditure of resources on collections. The less-obvious benefit, as Brill points out, is that the “negotiated” or “discounted” fees translate to handsome compensation for service providers:
. . . hospital patients who have private health insurance also get discounts off the listed chargemaster figures, assuming the hospital and insurance company have negotiated to include the hospital in the insurer’s network of providers that its customers can use. The insurance discounts are not nearly as steep as the Medicare markdowns, which means that even the discounted insurance-company rates fuel profits at these officially nonprofit hospitals. Those profits are further boosted by payments from the . . . patients who have no insurance . . . These patients are asked to pay the chargemaster list prices. If you are confused by the notion that those least able to pay are the ones singled out to pay the highest rates, welcome to the American medical marketplace.
. . . no matter how steep the discounts, the chargemaster prices are so high and so devoid of any calculation related to cost that the result is uniquely American: thousands of nonprofit institutions have morphed into high-profit, high-profile businesses that have the best of both worlds. They have become entities akin to low-risk, must-have public utilities that nonetheless pay their operators as if they were high-risk entrepreneurs.
On March 6, 2017, a list published in The Boston Globe revealed that at least 93 employees of tax-exempt nonprofits in Massachusetts earned over $1 Million in 2014. Many of these employees were executives at hospitals.
Although Massachusetts has a reputation as an expensive place to be sick, it is consistent with the national picture. Steven Brill asserts that, from coast to coast, we have created:
. . . a uniquely American gold rush for those who provide everything from wonder drugs to canes to high-tech implants to CT scans to hospital bill-coding and collection services. In hundreds of small and midsize cities across the country — from Stamford, Conn., to Marlton, N.J., to Oklahoma City — the American health care market has transformed tax-exempt “nonprofit” hospitals into the towns’ most profitable businesses and largest employers, often presided over by the regions’ most richly compensated executives. And in our largest cities, the system offers lavish paychecks even to midlevel hospital managers, like the 14 administrators at New York City’s Memorial Sloan-Kettering Cancer Center who are paid over $500,000 a year, including six who make over $1 million.
Taken as a whole, these powerful institutions and the bills they churn out dominate the nation’s economy and put demands on taxpayers to a degree unequaled anywhere else on earth. In the U.S., people spend almost 20% of the gross domestic product on health care, compared with about half that in most developed countries. Yet in every measurable way, the results our health care system produces are no better and often worse than the outcomes in those countries.
According to one of a series of exhaustive studies done by the McKinsey & Co. consulting firm, we spend more on health care than the next 10 biggest spenders combined: Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain and Australia.
My intent is not to start a conversation about how much compensation is “deserved” by anyone who provides medical services. However, I think we Americans need to discuss whether millions of Americans “deserve” to be excluded from health insurance coverage and health services due to a decision, conscious or not, that our resources must be directed first to the highly compensated individuals who are cashing in on the U.S. health care bonanza. That discussion is not taking place on Capitol Hill. If any reform plan is to be successful, it must address where the money goes.
Nearly everyone understands the mechanics of insurance: the group of insured persons pool their resources, in the form of premiums; when a covered event affects an insured person, payment is made from the pool, to or for the benefit of that person. In general, a larger pool means lower premiums.
In 2012, the Supreme Court of the United States decided questions of law arising from the ACA in the case of National Federation of Independent Business, et al. v. Sebelius, Secretary of Health and Human Services, et al. Justice Ginsburg, in a concurring opinion, pointed out the factors that differentiate health insurance from insurance of other types:
Unlike the market for almost any other product or service, the market for medical care is one in which all individuals inevitably participate. Virtually every person residing in the United States, sooner or later, will visit a doctor or other health-care professional. . . .
The large number of individuals without health insurance, Congress found, heavily burdens the national health-care market. See 42 U. S. C. §18091(2). As just noted, the cost of emergency care or treatment for a serious illness generally exceeds what an individual can afford to pay on her own. Unlike markets for most products, however, the inability to pay for care does not mean that an uninsured individual will receive no care. Federal and state law, as well as professional obligations and embedded social norms, require hospitals and physicians to provide care when it is most needed, regardless of the patient’s ability to pay. . . . (emphasis added)
As a consequence, medical-care providers deliver significant amounts of care to the uninsured for which the providers receive no payment. In 2008, for example, hospitals, physicians, and other health-care professionals received no compensation for $43 billion worth of the $116 billion in care they administered to those without insurance.
Health-care providers do not absorb these bad debts. Instead, they raise their prices, passing along the cost of uncompensated care to those who do pay reliably: the government and private insurance companies. In response, private insurers increase their premiums, shifting the cost of the elevated bills from providers onto those who carry insurance. The net result: Those with health insurance subsidize the medical care of those without it. As economists would describe what happens, the uninsured “free ride” on those who pay for health insurance. (emphasis added)
So, if you have been thinking that the folks who buy subsidized insurance through exchanges under the ACA are the primary driver of high costs in the current system, perhaps you ought to think again. More importantly, if you believe that excluding these folks from the system will lower your premiums or your cost of care, you are ignoring the realities of health insurance.
Before the Affordable Care Act became law, there was much discussion about establishing a so-called public option – a government health insurance plan, not unlike Medicare, that would collect premiums, limit the fees charged by providers, and operate in competition with private health insurance plans. Opponents promptly – and falsely – labeled the public option as a government takeover of health care, and it was not adopted. Here is a look at the basic math of private versus public insurance:
Private Health Insurance
Less: Staff & Administrative Costs ($$$$)
Less: Executive Compensation ($$$$)
Less: Amounts Paid for Care ($$$$)
Balance Profit, Bonuses, Taxes
Public Health Insurance
Less: Staff & Administrative Costs ($$$$)
Balance Amount Available for Care
It is clear that public health insurance, with no premium dollars going toward profits, bonuses or executive salaries, is less expensive than private insurance. However, one important point is not obvious in the outline above: the fees paid by public insurance (Medicare) are lower than the negotiated fees paid by private insurers, and these lower payouts are a factor in keeping premiums down. So, if public insurance were available to everyone alongside private insurance, large numbers of Americans without company-sponsored private health insurance would undoubtedly choose public insurance as the sensible option. The public option is worth considering once again. For obvious reasons, hospital and insurance executives would not like that at all.
The usual counter to the public option is the magic of competition. In the current debates over repealing and replacing the ACA, lawmakers and President Trump are banging the drum for a free-market health system that will lower costs through increased competition. Have you ever heard of a hospital seeking to solidify its market niche by becoming known as the low-cost provider? No, because there is no incentive to go in this direction, either in the marketplace or under law.
If the ACA were repealed, insurance companies could presumably offer “competitive” low-cost policies once again, with minimal coverage. Of course, anyone who purchased one of these policies would need to figure out which bankruptcy lawyer they might like to hire in the event of a medical catastrophe, since their share of treatment costs would be staggering.
If lawmakers were acting in good faith, they would (1) publicly identify the specific issues presented by the ACA – the elements that are not presently working, (2) propose and publicly debate amendments that address those issues, and (3) synthesize the agreed-upon amendments into a new, improved ACA.
Unfortunately, they are not acting in good faith. They would like to repeal and replace the ACA and characterize the replacement law with broad, general statements – you know, about freedom of choice and the false premise that free-market competition among insurers will lower the costs of care – before the general public realizes that the new law is about class and the insurance-company profits that give rise to campaign contributions. We deserve better.