answer is that we’ve stumbled into a system in which large sums of money are spent not on providing health care, but on denying it.
Possibly the best way to understand the U.S. health care mess is to look at the difference between what we—by which I mean the great majority of Americans—want our system to do, and what the system, as it currently works, gives the main players an incentive to do.
As I’ve argued, there’s a near-consensus that all Americans should receive basic health care. Those who believe otherwise keep their beliefs private, because saying that it’s okay to deny care to someone because he or she was born poor, or with the wrong genes, is politically unacceptable. Private insurance companies, however, don’t make money by paying for health care. They make money by collecting premiums while
Insurance companies try to hold down those unfortunate medical losses in two principal ways. One is through “risk selection,” otherwise known, rather obscurely, as “underwriting.” Both are euphemistic terms for refusing to sell insurance to people who are likely to need it—or charging them a very high price. When they can, insurers carefully screen applicants for indications that they are likely to need expensive care—family history, nature of employment, and, above all, preexisting conditions. Any indication that an applicant is more likely than average to have high medical costs, and any chance of affordable insurance goes out the window.
If someone who makes it through the process of risk selection nonetheless needs care, there’s a second line of defense: Insurers look for ways not to pay. They pick through the patient’s medical history to see if they can claim that there was some preexisting condition he or she failed to disclose, invalidating the insurance. More important in most cases, they challenge the claims submitted by doctors and hospitals, trying to find reasons why the treatment offered wasn’t their responsibility.
Insurers don’t do all this because they’re evil people. They do it because the structure of the system leaves them little choice. A nice insurance company, one that didn’t try to screen out costly clients and didn’t look for ways to avoid paying for care, would attract mainly high-risk clients, leaving it stuck with all the expenses other insurers were trying to avoid, and would quickly go out of business. If the people doing all this aren’t evil, however, the consequences are. Remember, there’s an almost universal belief that everyone should have adequate health care, which means having adequate insurance—but the way our system works, millions of people are denied insurance or offered it only at unaffordable prices. At the same time insurance companies spend huge sums screening applicants and fighting over payment. And health care providers, including doctors and hospitals, spend huge sums dealing and fighting with insurance companies to get paid. There’s a whole industry known as “denial management”: Companies that help doctors argue with insurance companies when payment is denied.
None of these costs arise in a universal health care system in which the government acts as insurer. If everyone is entitled to health insurance, there’s no need to screen people to eliminate high-risk clients. If a government agency provides insurance, there’s no need to fight over who pays for a medical procedure: If it’s a covered procedure the government pays. As a result government health insurance programs are much less bureaucratic and spend much less on administration than do private insurers. For example, Medicare spends only about 2 percent of its funds on administration; for private insurers the figure is about 15 percent. McKinsey Global estimates that in 2003 the extra administrative costs of the U.S. health insurance industry, as compared with the costs of the government insurance programs in other countries, ran to $84 billion.
And that literally isn’t the half of it. As the McKinsey report acknowledges, “This total does not include the additional administrative burden of the multipayor structure and insurance products on hospitals and outpatient centers…. Nor does it include the extra costs incurred by employers because of the need for robust human resources departments to administer health care benefits.”[7] One widely cited comparison of the U.S. and Canadian systems that tried to estimate these other costs concluded that in the United States total administrative cost—including both the costs of insurers and those of health care providers— accounts for 31 percent of health spending, compared with less than 17 percent in Canada. That would amount to around $300 billion in excess costs, or about a third of the difference between U.S. and Canadian spending.[8]
Where did the rest of the money go? Unlike other advanced countries, the United States doesn’t have a centralized agency bargaining with pharmaceutical companies over drug prices. As a result America actually uses fewer drugs per person than the average foreign country but pays far more, adding $100 billion or more to the overall cost of health care. There are also a variety of subtler inefficiencies in the U.S. system, such as perverse financial incentives that have led to a proliferation of outpatient CT scan facilities where the expensive equipment gets relatively little use.
Finally U.S. physicians are paid more than their counterparts in other countries. This isn’t, however, a large source of the difference in costs compared with administration, drugs, and other problems. The authors of that study comparing U.S. and Canadian administrative costs estimate that higher U.S. physicians’ salaries account for only about 2 percent of the difference in overall costs.
There’s one more terrible defect I should mention in the U.S. system: Insurers have little incentive to pay for preventive care, even when it would save large amounts in future medical costs. The most notorious example is diabetes, where insurers often won’t pay for treatment that might control the disease in its early stages but will pay for the foot amputations that are all too often a consequence of diabetes that gets out of control. This may seem perverse, but consider the incentives to the insurer: The insurer bears the cost when it pays for preventive care, but it’s unlikely to reap the benefits since people often switch insurers, or go from private insurance to Medicare when they reach sixty-five. So medical care that costs money now but saves money in the future may not be worth it from an individual insurance company’s perspective. By contrast, universal systems, which cover everyone for life, have a strong incentive to pay for preventive care.
So far I’ve made the U.S. system sound like a nightmare, which it is for many people. Nonetheless about 85 percent of Americans do have health insurance, and most of them receive decent care. Why does the system work even that well?
Part of the answer is that even in America the government plays a crucial role in providing health coverage. In 2005, 80 million Americans were covered by government programs, mostly Medicare and Medicaid plus other programs such as veterans’ health care. This was less than the 198 million covered by private health insurance—but because both programs are largely devoted to the elderly, who have much higher medical costs than younger people, the government actually pays for more medical care than do private insurers. In 2004 government programs paid for 44 percent of health care in America, while private insurance paid for only 36 percent; most of the rest was out-of-pocket spending, which exists everywhere.
The rest of the reason why the American system works as well as it does is that the great majority of Americans who do have private health insurance get it through their employers. This is partly the result of history —during World War II companies weren’t allowed to raise wages to compete for workers, so many offered health benefits instead. It’s also in large part the result of a special tax advantage: Health benefits, unlike salary, aren’t subject to income or payroll taxes. In order to get this tax advantage, however, an employer has to offer the same health plan to all its employees, regardless of their health history. Employment-based coverage, then, mitigates to some extent the problem of insurers screening out those who really need insurance. Also, large employers to some extent stand up for their employees’ rights to treatment.
As a result of these advantages, employment-based insurance has long provided a workable solution to the health care problem for many Americans—a solution that was good enough to head off demands for a fundamental overhaul of the system. But now that solution, such as it was, is breaking down.
The basic outlines of the U.S. health care system haven’t changed much since 1965, when LBJ created Medicare and Medicaid. Government insurance for the elderly and the poor; employment-based insurance for workers with good jobs at good companies; personal insurance, if you can get it, for those not lucky enough to get employment-based coverage; a scary life without insurance for a significant number of Americans. While the outlines have remained the same, however, the numbers have changed. Employment-based insurance is gradually unraveling. Medicaid has taken up some but not all of the slack. And fear of losing health insurance has come to pervade middle-class America.
