4 Strategies for Harnessing America’s Healthcare Costs

July 27, 2016 – Last week the Obama administration reported that health care spending in the United States will surpass $10,000 a person in 2016 and by 2025, health care will represent 20% of the total US economy, up from 17.8% last year.

Per capita health care spending in the United States is more than twice the average of other developed countries, with US employers picking up the tab for 49% of that.

As we review one of the final two principles in risk selection this week we examine why the Affordable Care Act (ACA) failed to reduce the cost of health care in America and what it means for employers come election time . . .

The Loss Must Be Definite and Measurable

For insurers to accurately determine the amount that is paid out when a loss is suffered, there must be bills to establish “proof of loss”. In the case of health insurance, insurers are like the NFL and healthcare providers like football players. Insurers negotiate contracts with healthcare providers to establish a definite and measurable amount to be paid for providing treatment. The growing problem is that the contracts are becoming more and more difficult to finance because players (healthcare providers) want more money.

Increasingly, a large number of providers are operating as “free agents”, and go without a contract altogether putting increased financial burden on the consumer. Providers such as Radiologists, Anesthesiologists, Pathologists, and ER physicians generally don’t contract with insurance companies which is why it’s not uncommon to receive a $12,000 anesthesiologist bill following a minor surgery, even though you have done your due diligence in ensuring that everyone involved in your care was contracted with your insurance company.

Lastly, there are huge, unexplained pricing disparities in healthcare both at the state level as well as nationally, none of which were addressed by a $1.207 trillion dollar Act that goes by the name of “Affordable Care”.

National Average Costs for Common Procedures in the United States*

*Stats provided by CIGNA of Arizona

4 Strategies For Cost-Containment

As discussed in previous articles, there are various health insurance systems in operation throughout the world and each struggles with its own set of problems. The chart below compares health insurance systems in similar free market economies, operating by supply and demand with varied degrees of government regulation.

Overview of Health Insurance Systems in Five Countries

Comparisons of Health Insurance Systems in Developed Countries – Boston University, Dept of Economics 2014.

Each of the countries shown approaches cost containment using tactics in one or more of the following areas:

1. Demand-Side Cost Sharing: is a tactic that uses pricing to encourage consumers to reduce utilization such as copays, deductibles, coinsurance, tiered pricing, and stop loss coverage. This tactic is relied on almost extensively in employer-funded markets like Japan and the United States and not at all in markets like Canada and Germany.
2. Supply-Side Cost Sharing: is a tactic that uses pricing to motivates suppliers (physicians, hospitals, pharmaceutical companies) to reduce utilization and/or plan payments per units. While the U.S. employs some supply-side cost sharing such as pay for performance bonuses to physicians and bundled hospital payments, this tactic is most prevalent in markets like Canada and Germany where the government actually regulates the fee levels of certain healthcare providers and pharmaceuticals.
3. Non-Price Rationing: is a tactic most likely to impact “access to care” by setting limits on the quantity of key resources available such as hospital beds, imaging equipment or number of physicians. Prevalent in Canada, Germany, Japan and Singapore government non-price rationing is virtually non-existent in the United States other than that seen in the Veteran Affairs (VA) or Medicare systems. In the American private health insurance system insurers employ non-price rationing strategy through various controls such as limited provider networks or plan design features aimed at reducing utilization such as coverage for colonoscopies at age 50.
4. Consumer Information: in some systems, consumer information regarding hospitals, physicians, health plans and patient surveys is made public to influence the buying decision. This stimulates competition and in theory should improve the quality of care delivered. This tactic is most prevalent in Japan and the U.S. and does not exist in Canada or Germany.

Rebuilding Our Healthcare Economy

The Affordable Care Act (ACA) did nothing to keep medical costs definite and measurable for insurers or healthcare consumers. Instead it imposed heavy regulations on the demand-side – particularly for employers who were already struggling to pay 49% of our nation’s growing healthcare bill.

I don’t support government operated health insurance, but I do believe all health insurance systems could be improved if certain “tweaks” were made in each of the four areas described above.

Canadians would benefit from introducing some demand-side cost control tactics such as copays, deductibles and additional health plan choices. Conversely, in the U.S. we are starting to see political understanding and support for certain supply-side and non-price rationing tactics.

As an example, both Donald Trump and Bernie Sanders have expressed agreement in allowing government-run Medicare to set drug prices. Emerging legislation in Medicare is important for employers because these trends often spill over into the private insurance arena which is predominantly employer-funded.

Fueled in part by an aging population, prescription drugs are the fastest growing area in terms of healthcare costs. In 2014 prescription drug costs were more than double that of other healthcare sectors including doctors and hospitals. That year Medicare spent $143 billion on drugs, and total sales for the pharmaceutical industry surpassed $317 billion.

At a campaign event in New Hampshire in February 2016, Donald Trump said “When it comes time to negotiate the cost of drugs, we are going to negotiate like crazy”.

Okay, so he’s not big on detail but he’s on the right path. The challenge is that the pharmaceutical industry has a strong lobbying presence and opposes the idea of government-set pricing for obvious reasons. It will take an act of Congress to pass legislation that would see American government negotiating directly with pharmaceutical companies, but I’m encouraged that we are at least discussing cost control in the context of principles that have been proven to create a sustainable economy.

Next week’s final principle in review: The Loss Cannot Be Catastrophic

Bonus: In the conclusion of this 6-part series I will elaborate on the most talked-about cost containment strategies proposed by politicians and identify which of the 4 economic cost-control tools – demand-side, supply-side, non-price rationing, or consumer information each employs.