John Locke Update / Research Brief

The Keys to Affordable Health Care

posted on in Health Care, Health Care & Human Services
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The United States health care system is a unique, complex web of consumers, providers, and payers. And it is expensive. Health care spending in the United States has increased from 5 percent of GDP in 1960 to 17.9 percent in 2016. Current projections estimate health care spending will increase at a rate of 5.5 percent each year and by 2026, the percent of GDP spent on health care will be just under 20 percent. So, how can Americans break this trend of unsustainable growth in health care spending? Rethinking policies that encourage consolidation and discourage competition would be a good start.

Many scholars contend that health care is not a typical service. The thinking that follows this assumption is, therefore, the health care market cannot allocate resources based on economic principles, such as supply and demand. Conventional economics tells us that prices are a direct result of the supply and demand for scarce resources. One of the main problems in our health care system is the amount of regulation that attempts to control costs and access artificially. Government control of this manner distorts the health care market because prices don’t provide information and the market can’t respond. Further, many of the attempts by the U.S. government to regulate the market foster consolidation of health care providers, leading to very little competition, higher prices, and fewer choices for American consumers.

Medicare’s Accountable Care Organizations (ACO) offer a good example to illustrate this phenomenon. These organizations were set up in an attempt to reign in Medicare spending by coordinating care for enrollees. Recent research on ACOs cannot determine if they actually save Medicare money or not. However, they are useful to illustrate how competition in the health care industry is stifled by government regulators. Centers for Medicaid and Medicare (CMS) Director Seema Verma explains how ACOs work:

ACOs are made up of groups of health care providers that are accountable for the quality of care and total health care spending for their assigned patients.  This is typically understood to mean that an ACO shares in savings if it keeps total health care spending for its patients below its given target, but the ACO has to repay CMS if spending for its patients exceeds its target.

Health care agreements that tie the payment structure to patient outcomes are normally referred to as “value-based health care.” I believe that, in the post-Affordable Care Act (ACA) era, the idea of value-based health care can be beneficial because it attempts to shift the focus of healthcare delivery to patient outcomes. In theory, a Medicare payment structure such as this could be a solution to try and save taxpayers’ dollars while shifting the focus to delivering high-quality, coordinated care. However, in practice, it only exacerbates the main issues that result from the government imposing policies that lead to provider consolidation: uneven federal reimbursement, arbitrary billing, and anti-competitive policies. Value-based care is the latest attempt to cope with exploding health care costs and no discernable increase in health outcomes.

In order for the cost of health care to slow and eventually trend down, we need a market where consumers have purchasing power. As the government involvement in health care grows, consolidation is encouraged, and consumers have very little choice in private or public provider networks. The problem lies in the fact that consumers, the ones paying for the care through insurance premiums and tax dollars, don’t know the cost of care. Costs are negotiated between insurers and providers. Aside from deductibles, co-payments, and co-insurance, consumers never know how much they are paying for the care they are getting. In large provider networks where they can get most types of care, they really don’t care to know prices. The lack of price transparency severs the link between price and quality. We often take our insurance companies at their word that they have given us a network of high-quality providers. Large-scale insurer-hospital agreements limit the choices patients have and therefore limit the number of natural pressures for providers to compete for patients. A lack of competition results in higher prices.

Hospitals and related providers don’t need to focus on attracting new patients because they have a patient population covered by an insurer they have contracted with. Further, with a guaranteed patient population, providers can charge very high rates knowing that consumers are going to use their physicians. Coordinated care advocates contend that keeping patients in the same referral network will be beneficial but, in many cases, the provider networks market share increases, which allows them to negotiate with insurance companies that pass higher prices to employers and consumers.

Consumers are bound by their insurance policies and the contracts insurance companies negotiate with health providers. In almost all cases, federal regulations mandate what insurers must cover. Participants in the health insurance markets don’t shop or negotiate for the best prices for services; they let their insurance do that for them. Health care provider networks want to increase their usage and regularly will keep all of the patients in the same referral network of physicians and specialists. Regardless of the procedure or the cost, a bill is sent to the insurer, public or private. Using high-cost providers in private insurance leads to premium increases for everyone in the risk pool. Using high-cost providers in public insurance leads in increased spending for Medicare and Medicaid which is paid for by taxpayers.

We need a system that operates like a normal market if we want to control costs. American consumers have lost most of their power because prices are a direct result of third-party reimbursement rates, which directly or indirectly are influenced by government regulators. This is the result of the ACA and other federal initiatives that try to overhaul the health care system by imposing mandates and instituting policies that encourage consolidation. The more control over the market that the government attempts to take, the more incentives there are for large provider networks. Large provider networks lead to very little competition which effects the way prices respond to supply and demand. The less that prices can react to supply and demand, the more artificially high prices American health care consumers will face.

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. After two years in the research division, he moved over to the government affairs team. Jordan now works with state decision makers in the public… ...

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