An earlier post highlighted who benefits from our nation’s dysfunctional healthcare system. Our system costs twice the average of the 12 countries that belong to Organization for Economic Cooperation and Development (OECD).  In 2022 our cost was $12,555 per capita compared to the average of $6,414 according to The Peterson Foundation. In the second highest nation – Switzerland – cost was $8,049.  The blog post demonstrated that we do not get better population health outcomes from the higher prices we pay.

In this post, let’s look at four root causes of higher spending on healthcare in the U.S. Any hope of finding a solution requires an understanding of these factors.

Our system

First, we have a highly fragmented system for paying healthcare providers. Medicare, Medicaid, self-insured employers, insurance companies (paying the healthcare bills for insured individuals), and individuals without insurance each require different billing forms and, for specific procedures, verification requirements (pre-certification). Therefore, any doctor’s office, clinic, or hospital faces complex administrative tasks to get permission to perform a health care service and receive payment.

The Peterson Foundation, based on 2021 data from the OECD, finds that the US spends more than all 12 OECD nations on administrative costs, $1,055 per capita. Germany is second at $306 per capita, less than one-third the US amount. (With a population of nearly 332 million people, just think what the U.S. could do with an extra $247 billion freed up if we could approach Germany’s per-capita spending on healthcare administration.)

Why so much higher? Other OECD nations have a single-payer system, which significantly reduces administrative complexity. Note that a single-payer system does not mean ownership of providers; it merely means that one payer covers all the medical costs. Each nation has different arrangements for consumer payments, benefit structures, and ownership of providers.

Our incentives

Second, our healthcare organizations receive payment for “treating people.” Those in the know call our healthcare system a “sick care” system. The more procedures performed on a patient, the higher the revenue in our fee-for-service healthcare payment model. Therefore, no financial incentive exists to keep people healthy and needing less high-cost care.

Ridiculous? Yes. An error that sends someone back to the hospital allows the hospital to earn more money. (Medicare recently started to penalize hospitals for readmissions, but my healthcare system friends say the penalty is peanuts compared to the revenue flow from readmissions. This statement does not mean providers purposely goof up, only that there is little incentive historically to provide high quality post-discharge care.)

Prices

Third, the US Congress has traditionally barred Medicare and Medicaid from negotiating prices with drug suppliers, who comprise 18% of our healthcare spending. A 2021 RAND study showed US drug prices are 2.56 times higher than those of other OECD countries (with brand name drugs 3.44 times higher). The situation is no better with commercial payers who use Pharmacy Benefit Managers. They earn more money in general the more we spend on drugs.  And we pay our healthcare professionals more than most nations.

Sadly, the uninsured pay the highest prices. There is no intermediary contracting for discounts, as insurers do.

Health

Fourth, we Americans are less healthy than people in other developed countries (measured in terms of weight, chronic illnesses, maternal care). The US National Institutes for Health finds that 50% of us have a chronic disease, and the cost of treating these diseases comprises 86% of our healthcare spending. For example, Leapfrog says 30% of hospital admissions are for Type 1 or Type 2 diabetes patients.  Our high uninsurance rate means people are less healthy as well. Hospital beds serving poor neighborhoods are full of people who could not afford their medications.

What needs to change, then, if we are to improve our health and control costs?

We need a shift to value-based or population-based healthcare as an alternative to the fee-for-service payment model. With this shift, there would be incentives to keep people healthy, better manage chronic diseases, and keep people out of the hospital. These payment models pay for outcomes, not each procedure.

To understand the difference, take Medicare. Traditional Medicare is fee-for-service based, but Medicare Advantage (MA) is population-based payment. The federal government pays the MA insurers to manage the healthcare of the insurer’s MA population. The Centers for Medicare & Medicaid Services (CMS) also rate how well the plans perform so that providers have an incentive to offer quality care, not less care. Another new payment approach is pay-per-case – e.g., a set fee for a knee replacement that bundles all the services associated with a knee replacement (pre-op, operation, post-op, hospital stay, Physical Therapy, supplies, and the joint.)

Sadly, too much commercial insurance remains fee-for-service. But thankfully, MA is snowballing. And CMS has also established Accountable Care Organizations – providers who take on the financial risk and manage care for a given population.

We already see positive results from the shift in incentives – hospital-at-home programs, chronic care management approaches to keep people out of the hospital, and primary care professionals serving as one’s medical home in these population-based programs. We’re also seeing healthcare organizations identify and address social determinants of health (housing, food insecurity, lack of transport to see a doctor) to keep people healthier.

These changes in payment models are terrific – but they are too few and too little. Corporate America needs a wake-up call to move away from fee-for-service insurance plans. CMS has tried to do its part, especially after Biden enabled CMS to negotiate prices for some drugs (e.g., insulin).

A solution to administrative costs is a single-payer system. It could be administered by the private sector offeirng Medicare supplemental plans and Medicare Advantage plans, as we have now for the elderly. It would solve our uninsured problem. It would also get employers out of managing healthcare benefits, making our workers more competitive in global markets.

What happens under Trump is uncertain. He plans to reduce subsidies on ACA insurance. This approach will make healthcare less affordable, so we’ll see more uninsured.  We’ll save money in the short term. But the uninsured become less healthy and more expensive in the long term. We all pay that bill.