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Why the U.S. Should Treat Health Care Like a Utility, Not a Market

January 6, 2014

On January 1, 2014, the Affordable Care Act went fully into effect. But for all of the furious fighting over the law these past five years, Obamacare was always an evolutionary reform grafted onto the existing American health care system. The Medicaid public insurance program has been extended to roughly four million lower income Americans so far. About two million more people have purchased private insurance, many of them aided by subsidies from Uncle Sam. And while many (though not all) of the worst abuses that let insurers pad their profits by denying or dropping care for the sick have been banned, the edifice of private insurance remains largely intact. Far from a "government takeover of health care," Obamacare preserves all of the hallmarks--private insurance companies, private hospitals, private doctors, and the patchwork of different systems for veterans, seniors, workers, and the poor--that define the American model of health care provision.

Nevertheless, the conservative sound bite assembly line continues to churn out the same tried and untrue talking points. Declaring "Obamacare is a full-scale federal takeover," former psychiatrist turned conservative columnist Charles Krauthammer warned two weeks ago:

Three years ago I predicted that Obamacare would turn insurers into the lapdog equivalent of utility companies. I undershot. They are being treated as wholly owned subsidiaries.

(The carriers' earnings and stock prices suggest otherwise.)
If Krauthammer's formulation sounds vaguely familiar, it should. During the 2012 presidential campaign, GOP torchbearer Mitt Romney explained why he wanted to set fire to the Affordable Care Act:

"We can get health care to act more like a consumer market, and if we do that and we stop making it like a big government-managed utility, we're going to see better prices, lower costs and better care."

But Romney, Krauthammer, and their ilk in the Republican Party aren't just wrong. They have it exactly backward. As a quick tour of the American model and successful systems in place in other modern economies worldwide shows, health care should be treated less like a free market and more like a government regulated utility.
Let's start with the conservative free-market nirvana, where buyer and seller each armed with perfect information come together in a voluntary transaction. But from the get-go, the patient-as-consumer faces a knowledge asymmetry almost impossible to overcome. Americans' general deference to physicians isn't just a cultural trait, it simply reflects the expertise and training regarding diagnoses, possible treatments, and likely outcomes doctors possess and their patients do not. For some cases and for some conditions, the layman can narrow that yawning information gap. But WebMD or no, it can't be eliminated. "Health" is not a commodity. Those who believe that choosing a health care product or service is no different than buying a car, television, or cell phone might feel differently after, say, developing colon cancer.
But even if the diagnoses, treatments and cures for heart disease, diabetes or depression could be purchased in a free market, in the United States the buyer simply doesn't--or--can't know what price he or she will pay. As Stephen Brill documented in March ("Bitter Pill: Why Medical Bills Are Killing Us"), hospital prices for drugs, supplies, and procedures are completely opaque. The answer from the so-called "charge master" about what anything costs depends on whether the patient is insured or uninsured (the latter often forced to pay multiple times more than the former) and who the insurer is. As it turns out, that mystery pricing is one of the hallmarks of the American model that spends $2.8 trillion a year (over 17 percent of GDP) on health care, more than Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain, and Australia combined:

As we examine other bills, we'll see that like Medicare patients, the large portion of 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 tens of millions of patients who, like the unemployed Janice S., have no insurance or whose insurance does not apply because the patient has exceeded the coverage limits. 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.

And in that "marketplace," prices vary widely from state to state, city to city and even block to block. Data compiled by the Centers for Medicare and Medicaid Services (CMS) in May found that "hospitals charge Medicare wildly differing amounts--sometimes 10 to 20 times what Medicare typically reimburses--for the same procedure," with the 3,300 hospitals analyzed showing wide variation "not only regionally but among hospitals in the same area or city." Making matters worse, the accelerating trends of mergers and private equity investments in hospital chains have spawned the use of unnecessary procedures and "code-inflation" to extract greater profits from patients, insurers and the federal government. And as the Washington Monthly and the Washington Post documented, the American Medical Association and its secret Specialty Society Relative Value Scale Update Committee (RUC) quietly set the prices Medicare and private insurers will pay physicians based on sometimes dubious assessments of how long a given procedure takes. So whether we're discussing colonoscopies, hip replacements, asthma inhalers, or ER visits, the only certainty is that the cost to Americans will be higher--sometimes orders of magnitude higher--than those faced by the citizens of Germany, Spain, Canada, Japan, or in just about any other major national economy.

But even if our American patient-as-consumer had access to transparent pricing information and knew everything doctors know about his or her treatment, health care would still not constitute a free market for a simple reason. In most cases, the transaction between the patient/buyer and the provider/seller is coerced. That is, when you're sick, you can't simply walk out of the market. You have to buy care from someone--or else. (Recent studies have the put the number of uninsured Americans who needlessly die each year as high as 45,000.) Worse still, because you can never know in advance about a bank account-draining illness or accident or condition that could require regular or lifelong care, insurance is the only path forward.
The element of coercion--that patients in emergency situations or not usually have no choice but to purchase treatment--is why the rhetoric of Rand Paul and his ilk is so cynical and dangerous. Lasik surgery, the GOP's favorite example of their ideal health care system at work, is entirely elective. Of course, you'd never know that from listening to the ophthalmologist Senator from Kentucky:

"Insurance doesn't cover Lasik surgery, the surgery to get rid of glasses," Paul remarks. "So it started at about $2,000 an eye, maybe even $2,500 an eye, and it's down in some communities to under $500 an eye because competition works and people call on average four doctors to get the price and see how much it's going to cost."

Give that a try the next time you go for chemotherapy, kidney dialysis or, say, rupture your spleen. Rather than spending time doing the medical equivalent of window shopping, it would be better to remember the advice of Dr. Paul Krugman:

There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn't work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.

That overwhelming evidence comes from just about every other economic competitor of the United States. And regardless of how they manage their nation's own complex health ecosystem of insurers, pharmaceutical firms, device manufacturers, hospitals, and doctors, in one form or another each relies on the same mechanism: rate setting.
To put it another way, countries as diverse as Germany, Japan, the UK, France, Switzerland, and Taiwan treat health care as a highly regulated utility, not a free market. Like access to water, telephones, electricity, and education, America's partners and competitors have decided that health care simply will be part of the social contract for their citizens in the 21st century. (Such a notion couldn't be more alien to the likes of the Heritage Foundation, which recently lamented that many American poor enjoy such luxuries as television, air conditioning, and cell phones.) And to make it all work, government sets the prices that insurers, hospitals, drug companies, doctors, and pharmacies can charge.
In his 2009 book The Healing of America and companion PBS Frontline documentary Sick Around the World, T.R. Reid examined the different approaches used by the UK, Germany, Japan, Taiwan, and Switzerland to deliver universal health care. But while the UK's National Health Service (NHS) is a single payer system in which hospitals are run by the government and doctors employees of it, the other nations feature private insurers, hospitals, and physicians just like the United States but with one big exception. As Sarah Kliff explained, in the United States "it's that the federal government does not regulate the prices that health-care providers can charge."

Sick Around the World describes the four basic models including the "out of pocket" approach, the completely government-run system implemented in the UK, the Bismarckian social insurance strategies in Germany and Japan, the single-payer system in Canada and emulated by South Korea and Taiwan:

Reid reports next from Japan, which boasts the second largest economy and the best health statistics in the world. The Japanese go to the doctor three times as often as Americans, have more than twice as many MRI scans, use more drugs, and spend more days in the hospital. Yet Japan spends about half as much on health care per capita as the United States.
One secret to Japan's success? By law, everyone must buy health insurance--either through an employer or a community plan--and, unlike in the U.S., insurers can neither turn down a patient for a pre-existing illness, nor are they allowed to make a profit.
Reid's journey then takes him to Germany, the country that invented the concept of a national health care system. For its 80 million people, Germany offers universal health care, including medical, dental, mental health, homeopathy and spa treatment. Professor Karl Lauterbach, a member of the German parliament, describes it as "a system where the rich pay for the poor and where the ill are covered by the healthy." As they do in Japan, medical providers must charge standard prices. This keeps costs down, but it also means physicians in Germany earn between half and two-thirds as much as their U.S. counterparts.

Given the admiration it enjoys from conservatives like Megan McArdle and Avik Roy, Switzerland provides an especially helpful case study for evaluating the U.S. health care system. Unlike France and Japan in which the central government regularly negotiates prices and fees directly with providers, Reid explains:

The Swiss system is social insurance like in Japan and Germany, voted in by a national referendum in 1994. Switzerland didn't have far to go to achieve universal coverage; 95 percent of the population already had voluntary insurance when the law was passed. All citizens are required to have coverage; those not covered were automatically assigned to a company. The government provides assistance to those who can't afford the premiums.
How does it work? The Swiss example shows that universal coverage is possible, even in a highly capitalist nation with powerful insurance and pharmaceutical industries. Insurance companies are not allowed to make a profit on basic care and are prohibited from cherry-picking only young and healthy applicants. They can make money on supplemental insurance, however. As in Germany, the insurers negotiate with providers to set standard prices for services, but drug prices are set by the government.

Regardless, the American health system is unique in the world:

These four models should be fairly easy for Americans to understand because we have elements of all of them in our fragmented national health care apparatus. When it comes to treating veterans, we're Britain or Cuba. For Americans over the age of 65 on Medicare, we're Canada. For working Americans who get insurance on the job, we're Germany.
For the 15 percent of the population who have no health insurance, the United States is Cambodia or Burkina Faso or rural India, with access to a doctor available if you can pay the bill out-of-pocket at the time of treatment or if you're sick enough to be admitted to the emergency ward at the public hospital.
The United States is unlike every other country because it maintains so many separate systems for separate classes of people. All the other countries have settled on one model for everybody. This is much simpler than the U.S. system; it's fairer and cheaper, too.

Make that much simpler and much cheaper, all while producing health care outcomes that are as good or better than those in the United States. Thanks to the supposed free market in the United States, America's 40 million asthma sufferers have to pay $150 for an Albuterol inhaler, compared to $20 in the UK. On average, a colonoscopy in the U.S. ($1,185) costs double the amount in Switzerland ($655). An MRI cost four times as much here as for the Dutch; an angiogram is almost 30 times more expensive for an American ($914) than a Canadian ($35). It's plain that the $7,700 hip replacement in Spain costs six times more here. But as the charts sprinkled throughout this piece show, Americans spend much more (double the OECD average) while actually using less health care (half the physician consultations) than their counterparts in other countries. Touted by Republican free marketeers as "the best health care system in the world," America's is the costliest and among the least efficient even as it fails to measure up to those of our trading partners and allies.

It doesn't have to be this way. Thanks to the Affordable Care Act, improvement has already started. America's medical inflation has slowed dramatically, a trend which could eliminate much of the nation's long-term debt challenge if it continues. (Much of that slow-down is due to the impact of the recession which began in late 2007.) By 2023, roughly 27 million of America's uninsured will gain coverage under the Affordable Care Act. Some of the insurance industry's most grotesque profit-making practices--like excluding those with pre-existing conditions, using "rescission" to drop policyholders when they get sick, "purging" and "pricing out" customers who cut into the bottom line and annual and lifetime benefits caps--are illegal now. (Others dirty tricks from the insurers' playbook, like drastically narrowing physician and hospital networks, need to be curbed.) As Michael Moore suggested in his December 31 New York Times op-ed, expanding Medicaid to all 50 states, adding a public insurance option to the health care exchanges and potentially expanding on Vermont's single-payer experiment could all help the United States get closer to the goal of universal coverage for all. (But more impactful reforms--like single payer or non-profit, private basic insurance plans, like negotiated pricing with hospitals, doctors, and drug companies, like transitioning from fee-based to capitated payment models and like free medical school tuition in exchange for physicians' reduced incomes--all seem beyond the politics of the possible.)
But even then, American health care will still be more expensive that it should be and less equitable than it could be. That's because for the foreseeable future, American health care will still be viewed as the free market conservative ideologues demand instead of the public utility it should be.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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