> In many situations there are perverse incentives to operate inefficiently.
Would you mind taking the time elaborate on this? Inefficiency in the US healthcare system is something everyone talks about but concrete examples are few and far in between. I would love to get an insiders perspective on this!
I work in a university affiliated cancer center lab, inside of the largest hospital in my area. Due to a weird contract signed many moons ago, we are very restricted in the lab tests we are allowed to run for the cancer center physicians (employed by the university). the dumbest example is this: the total/direct bilirubin ratio. Total bilirubin is one test that we run on almost every patient as part of the comprehensive metabolic panel. Direct bilirubin is less common, but we do run a fair few of them. The calculation for the ratio is simple division. But when the ratio is ordered as a standalone test, it must be sent to another lab in the hospital megacampus. But not the gigantic lab in the main building, the lab in the children's hospital. Nobody has a good explanation for why I must send this test off into the wild blue yonder instead of simply doing some arithmetic, and I'm beginning to doubt that there is one at all.
Are there significant costs with sending the test to a far away land? I know some people that work in the medical field, and they've told me about tests being thrown into the request pile most likely for the sake of revenue.
I have one example that I think a lot of healthcare consumers deal with - ridiculous prices for the uninsured.
The history is fascinating - in order to promote more transparency in the cost of healthcare, the gov't passed a law that defines "usual, customary and reasonable (UCR)" prices. This was because insurers used to just pay the bill, no questions asked (50+ years ago). Then they realized that the price for the same procedure varied a lot. So the law said that one could only charge the "usual and customary" price.
Sounds good right? Who wouldn't want to know the typical price?
Well, a part of that law was that the UCR price was the maximum that could be charged. There was no law about charging less.
So insurers start to negotiate discounts. Some insurers would get a discount, otherwise they pay UCR. That creates a huge incentive to push UCR as high as you can, otherwise you're potentially leaving money on the table if you get a random insurer willing to pay UCR.
So fast forward a few decades and the UCR prices have undergone astronomical inflation. No insurer pays U&C any more. In fact, they might pay 20-30% of U&C. It's nowhere close to "usual, customary and reasonable".
It wouldn't be a disaster if everyone had insurance because nobody pays it. But we do have uninsured and that's the price they're quoted now. $15,000 for an MRI that an insurer would pay $1500.
As they say, the road to hell is paved with good intentions.
The problem here seems to be that UCR prices are not correctly calculated, as the net prices that are actually paid, not label price. If UCR would be defined as the median of net prices charged in the last 24 months, inflation would halt. As for the correct way to infer net prices, it's a problem related to transfer pricing, for which good accounting practices exist, that would take into consideration exotic arrangements for paying back the discount, in stock, other contracts etc.
If UCR would be defined as the median of net prices charged in the last 24 months, inflation would halt.
They do something similar with drug prices for Medicare called Average Selling Price (ASP). That system gets gamed as well. In fact, it actually causes prices to rise.
Medicare requires hospitals to report pricing, so they have a decent sense as to what actual costs are. You could create a law saying you have to be within 20% of that price. It wouldn’t be perfect, but it might help.
Thanks for the specifics. The drug prices problem has a quite direct solution for single buyer systems: competitive tenders for generics, and QALY price ceilings for patent drugs. If a producer asks for a too high price compared to the health outcome of their drug, the total budget is reassigned among existing drugs, thus forcing all pharmaceutic companies to compete to deliver the best overall healthcare outcome for a given budget.
Too bad the politics in USA prevent this and dismiss it as "death panels", and people are led to believe the hard trade-offs in healthcare can somehow magically go away.
The 80/20 rule in the ACA has to be one of the most perverse incentives out there. It states 80% of premiums have to go to providing care, and all admin costs and profits have to come out of the remaining 20%.
It’s obvious why this might sound like a good idea, but only slightly less obvious why it’s a terrible one. It means that the primary mechanism available to increase profits is to drive up care spending as much as possible. Because if the 80% is a bigger number, the 20% will be too.
One small (but major) nuance: the 80/20 rule applies specifically to the _insurance_ business.
So what's another way to increase profits in addition to letting care spending keep creeping up? Add non-insurance lines of business to the company, i.e. vertically integrate by acquiring some of the middle men you're paying.
Insurers snatching up PBMs[1] (or in some cases, PBMs snatching up insurers) is one insidious example. For those unfamiliar, PBMs are the companies that manage your prescription benefits. Insurers negotiate a predictable rate card with the PBM for the drugs on their formulary, insulating the insurer from market and regional pricing volatility. The PBM then negotiates with all the various pharmacies on actual prices. So when you purchase a prescription:
1. You pay your share (a fixed copay for many plans)
2. If the price the PBM negotiated was more than your copay, the PBM pays the pharmacy the difference
3. The insurer then pays the PBM whatever pre-negotiated rate they have for that prescription
With the PBM deriving their revenue/profit from the spread they're able to generate in the process[2]. But when the insurer and PBM are one-in-the-same, that spread is really just an inter-company accounting transfer that ultimately rolls up to the same P&L. But it's a _magical_ inter-company transfer, as the insurer side of the books count it as a medical cost (part of the 80% spending requirement) and the PBM side of the books (that show it as revenue) aren't subject to the 80/20 requirements. And best of all, the insurers spent so many years letting cost inflation run rampant[3] that such egregious slight-of-hand easily passes the arms length test for transfer pricing[4].
[2] They also have other revenue streams, such as squeezing rebates out of drug manufacturers as well. But the simplified scenario above covers the gist of things, and illustrates the primary conflict of interest involved.
[3] As [1] mentioned with the CVS/Aetna example, PBMs can be far more profitable than insurers. CVS generated 2.5x more profit than Aetna when they merged.
Unclear why the downvotes - the system dynamics the parent is describing are valid. Insurers win over time if total costs go up in a predictable way. (Note: Not true for self-insured companies, such which includes essentially all large employers.)
Hence employers need to be removed from the equation so everyone ends up on healthcare.gov and there can be a whole bunch of insurance companies competing to keep premiums down so people purchase from them, just like car insurance.
The people who decide what treatments and tests are necessary are the doctors, so the marketing for this would have to be "buy our cheap insurance, we deny coverage to more testing and treatments than the other insurers do". Which is obviously not a winning strategy.
If you combine that with the increase in insurer owned clinics and hospitals (which unsurprisingly saw a sharp uptick around the time the ACA came into effect), then the insurance company gets to profit more twice. Once when they jack up the premiums, and a second time when those expenses show up as revenue in their other businesses.
I'm all for giving more power to consumers, but when you have a regulation that creates such a strong incentive for raising premiums, layering more haphazard regulation on top of it isn't going to help.
This works if there are multiple insurance companies competing for business, which would require everyone to be forced to healthcare.gov so there is a simple marketplace with sufficient number of insurance customers so that bad actors have competition.
And from my experience, the best healthcare is provided by Kaiser Permanente, which offers health insurance and healthcare under one company.
Pricing in medicine is jacked up because of low supply of workers (the grunt work is undesireable and doctors take a long time to license as well as residency funding restrictions), and infinite liability and legal costs that have to be priced in. On top of that, medicine is very complex, so you have to pay two or more very highly qualified people to double and triple check things.
Also, healthcare cost increases have slowed drastically since introduction of ACA:
It's a deep topic but I can cherry pick three big reasons for you in no particular order.
-Most hospitals and larger primary care installations are monopolies. There is not and cannot be for practical, zoning and regulatory reasons any sort of meaningful "competition". As a result most regulation and enforcement is toothless because no one wants the resulting problems of closing, even temporarily, a facility that is the only care for tens of thousands of people.
When there are no consequences for bad behaviors things tends toward a lowest common denominator. There are many examples but MLK Harbor Hospital strikes me as a particularly horrific one. It operated as one of the worst facilities in the US, by many objective and subjective measures, for 35+ years before it was finally closed.
-Healthcare, at it's base, is a resource allocation problem. When I last calculated what it would cost to provide every american with all of the healthcare they might reasonably consume which was 2019, that number was ~92 trillion dollars a year. We actually spend ~4 trillion. How do we decide who doesn't get the thing they should get at the time they should get it? We employ a pseudo-random system and as a result it is incredibly inefficient. Without getting into the deep dive that is healthcare costs I will just point out that the US has by far the largest number of acute care, ICU and trauma center services per capita anywhere in the world. For example we have seven times the number per capita that a country we are commonly compare to does, England. This is astronomically expensive. Without ultimately capping in some way the total resource expenditure per person this will continue. Is it a worthwhile use of resources to expend hundreds of thousands of dollars to extend someones life for 2 weeks? Maybe it depends on the someone, an 85 year old? An 8 year old? It's a very difficult set of questions that mostly just gets avoided.
-Patients do not have a rational sense of value when it comes to healthcare services. The US has very low taxes compared to much of the world and when you take that into account it has relatively low healthcare insurance premiums. I'm not saying they are low to people on an individual basis but it's a complex thing. Take canada. Every canadian individual including children is paying, at a minimum, ~$600 a month for healthcare in taxes. They don't think of it that way because it is lumped in to the tax bill. Many people in the US pay much less than this.
I have a friend who was recently complaining to me about a $700 ambulance bill. They were doing this as they were holding a brand new $1,000 iphone in their hand. I sat down with them and in a "napkin" spreadsheet created a fictitious ambulance service. They walked away thinking $600 was a pretty good deal. The inefficiency is patients put off a lot of things that are small due to cost. Those things dramatically exacerbate inefficiencies. See points 1 & 2.
> They [Canadians] don't think of it that way because it is lumped in to the tax bill. Many people in the US pay much less than this.
There’s a good chance that most Americans are paying less toward gov health expenditures than the average Canadian due to income inequality. But in aggregate, it is more per person.
> Most hospitals and larger primary care installations are monopolies. There is not and cannot be for practical, zoning and regulatory reasons any sort of meaningful "competition".
This, by itself, realistically rules out any sort of "free market" healthcare system.
American (income) taxes are not as low as people think they are, and if you consider that health insurance plans are a form of tax, then it can be higher in places like California or maybe a couple of % points less in other states with income tax.
Would you mind taking the time elaborate on this? Inefficiency in the US healthcare system is something everyone talks about but concrete examples are few and far in between. I would love to get an insiders perspective on this!