Renovating America’s Healthcare System – Part One

Although the United States has the world’s most competent healthcare professionals and offers the most advanced healthcare services, its healthcare system is nevertheless rated well below those of a majority of the world’s developed nations. I explored this subject in June 2024 in an article entitled “Our Sick Healthcare System.” At the heart of our healthcare system’s shortcomings is that healthcare is too costly for roughly a fifth of our nation’s residents. Underlying this problem is the fact that many of our country’s political leaders believe that maintaining one’s health should be considered the responsibility of each individual and not that our government. That view is rejected by the governments of those countries which have the most highly rated national healthcare systems which both regulate and fund healthcare services.

Despite the efforts of many member of Congress, our federal government has taken a number of important actions to protect the health of U.S. citizens. Beginning in 1906 it created the Food and Drug Administration which protects the health of Americans by regulating the safety and efficacy of pharmaceutical products and the food we consume. Following World War I the Veterans Administration was created which provides healthcare services to military personnel. Equally important is the work done by Center for Disease Control (established in 1940) which monitors the spread of infectious diseases. In the 1960s, President Lyndon Johnson caused the enactment of his “Fair Deal” which included a number of health-oriented social welfare programs like Medicare and Medicaid, both of which provide financial assistance for their enrollees to pay for medical services and prescription pharmaceuticals. In 1987, the National Institute of Health was created  to funds research aimed at improving the healthcare including the development of vaccines to prevent the spread of infectious diseases; and in 2010 the Obama administration enacted the Affordable Care Act which provides financial support to low-income families to purchase healthcare insurance.  

Thus, the problem of healthcare in the United States isn’t that our government disclaims responsibility for maintaining the health of its citizens. Rather, it’s the haphazard manner in which changes to our healthcare system have been made and the demographic changes in our population which have increased the demand for healthcare services. Indeed, a close examination of the U.S. healthcare system reveals that, like so many of our nation’s cities, it just grew without any appreciation (much less a plan) as to how all of its component parts would work together. It also suffers from the fact that it is now being called upon to treat many health issues that didn’t previously exist or were previously deemed untreatable. As a result, it has become economically unsustainable. This means that it needs to be completely overhauled if it is to continue to serve it intended function.

Underlying many of the problems besetting our healthcare system is that it is constructed to operate with resources being allocated as dictated by “free-market” activity on the theory that this will achieve maximum efficiency. This essentially assumes that a patient in desperate need of relief from his or her medical affliction has equal bargaining power with a doctor who is not operating under any form of duress. This imbalance for regulating the price of medical services is aggravated by the fact that health problems are largely unpredictable which means that some form of insurance is required to effectively spread the economic impact of medical conditions over a large segment of the population and thereby enable the nation’s citizens to pay the high medical costs associated with a life-threatening disease or major accident when those events occur.

In the U.S. health insurance was born in the 1920s in a free-market environment; and today there are over 1,000 private insurance companies that help Americans manage their healthcare costs. These privately-owned companies, while performing a useful service, do so for charges that compensate them for the services they perform. Their charges, however, greatly exceed the corresponding costs incurred by the U.S. government-run healthcare insurance programs (roughly 17% for privately-owned insurers compared to roughly 3% for government-run health insurance programs). It also assumes that healthcare insurers will perform their functions in the best interests of their insureds, an assumption which does not fully withstand scrutiny. 

The problems posed by a private healthcare insurance system, however, run much deeper than the differential in amounts extracted from healthcare expenditures by privately-owned insurers and government-run healthcare insurance programs. As one would expect, each healthcare insurer bargains with healthcare providers over the amount it’s willing to pay for each medical procedure benefiting its insureds. In order to minimize the costs passed on to their insureds and to protect their own profit margins, all healthcare insurers establish a plethora of operating rules designed to make sure that they pay no more than is necessary. The operating restrictions imposed by over 1,000 different insurance companies create an enormous administrative burden on healthcare providers which adds another 10% to the costs of providing healthcare services. 

Also problematic is that in bargaining on behalf of their insureds, healthcare insurers tend to place their own profitability ahead of serving the best interests of their insureds. To that end, they have figured out that they can earn more if healthcare providers charge more for their services. That’s because their insureds requiring medical help will generally pay whatever is required to secure the healthcare services they need. This leaves medical insurers with little pressure to drive a hard bargain with medical providers over the price of their services. Nevertheless, because healthcare insurers operate in a free-market environment one might reasonably expect that competitive pressures would force them to bargain tenaciously on behalf of their insureds. Unfortunately, that does not appear to happen for two reasons.

First, although there are over 1,000 healthcare insurers operating in the U.S., the market for medical insurance is dominated by less than a dozen such companies. Those companies have come to recognize that it much easier to have their insureds pay more than to have medical providers accept less for their services. The fact that they personally profit from higher medical costs certainly helps them to reach that conclusion. Moreover, they also understand that is in their own best interest to NOT compete over price with other healthcare insurers. Although all of the major healthcare insurers advertise heavily each Fall in advance of the next insurance renewal deadline, their TV commercials stress the breadth of their coverage and their concern for the well-being of their insureds and rarely, if ever, mention price.

Perhaps more important is that the healthcare funding system, in the parlance of President Trump, has been rigged against the American public. That is because the healthcare insurers in 2010 used their generous campaign contributions to convince the members of the U.S. Congress to include a provision in the Affordable Care Act that prohibits the Medicare Program (which funds over 20% of all medical expenditures in the U.S.) from bargaining with medical providers over the price of their services. Were this not enough, the market for healthcare insurance is further stacked against the American public by the fact the Congress is very reluctant to limit the funding it allocates to the Medicare Program upon which 67.3 million Americans rely. Indeed, members of Congress clearly prefer to engage in deficit spending over cutting the funding it feeds the highly popular Medicare Program. The result is that the largest financier of healthcare in the U.S. does not use its bargaining power to keep medical costs low.

As collusive as the nation’s healthcare insurers have become when dealing with healthcare providers, the prescription drug insurers are even more so in their dealings with prescription drug manufacturers. This becomes immediately obvious when one compares the prices of prescription drugs in the U.S. with the prices of those same drugs in other developed nation where they are priced at roughly 35% of what they cost in the U.S.  I confirmed this reality when I first examined the explanations of benefit (or EOB’s) which I received from my prescription drug insurer. What I found was that a little over 50% of the costs of the prescription drugs I was taking was being “paid” by my prescription drug insurer. I found that troubling because I was paying no premium for my prescription drug coverage. What I quickly realized was that my “co-payment” alone was not only covering the entire costs of producing the drugs I was taking (as well as a 13% after-tax profit for the manufacturers), but also was sufficient to cover the processing costs incurred and a profit for my insurer.

But the problem of collusion within the market for prescription drug is even worse than my experience suggests. That’s because the roughly 25% of Americans that don’t have prescription drug coverage are charged an estimated 19% more than the “nominal price” charged to those who have prescription drug coverage. This should make you wonder why uninsured individuals are charged significantly more than the price purportedly being charged to insured individuals. The answer to this question probably goes beyond the desire of prescription drug manufacturers’ to take unfair advantage of those unfortunate individuals who don’t possess the collective bargaining power of the prescription drug insurers. Indeed, it could simply be the result of a further collusive understanding among the drug manufacturers and the drug insurers to encourage more individuals to purchase prescription coverage which benefits both the manufacturers and the insurers. That’s because individuals without prescription drug coverage are likely to choose to take a less expensive generic drug rather than pony up the cost of a highly touted branded product.

There is still more intrigue involved in the sale of prescription drugs. Enter the pharmacy benefit managers (or PBMs). This is a group of roughly a dozen companies that are ostensibly employed by the largest prescription drug insurers to negotiate on their behalf with the prescription drug manufacturers. Specifically, they are engaged to negotiate which drugs the prescription drug insurers are willing to insure (AKA their “formularies”) and what prices they are willing to pay for each such drug. The drug insurers ostensibly employ the PBMs because of the complexities of developing their drug formularies.

Underlying those complexities are the following factors. First, there are prescription drugs created to address literally hundreds of physical conditions and maladies; and there may be as many as a dozen prescription drugs for each such affliction. In addition, most of those individual drugs may not prove efficacious and/or without adverse side effects for every patient. In fact, the most widely used prescription drugs are only prove satisfactory for about 50% of those individuals they are designed to help. It should also be appreciated that many of the available drugs may have lost their patent protection and are currently being sold at roughly 10% or less than what they were sold for immediately prior to the advent of generic competition. 

Thus, the PBMs have to sort out a giant puzzle in each negotiation. Making that puzzle even more complex is that at least twice a year prescription drug manufacturers increase the prices of their drugs that remain under patent protection. To make this puzzle even more confounding is the fact that the PBMs (which are nominally retained by the drug insurers) are actually owned by companies that also own the nation’s largest wholesale and retail drug distributors. But wait, there’s more! The PBMs also receive undisclosed amounts of compensation from the drug manufacturers with whom they have been engaged to bargain. Adding to that, the negotiations between the PBMs and the prescription drug manufacturers are conducted in secret which makes it impossible to ascertain just how the monies that are being paid for prescription drugs are divided up among the players in this unholy industry.

Now, I ask you: “Have you ever heard of a negotiating agent which receives compensation from the parties with whom it has been engaged to bargain?” Also, why would a prescription drug insurer even want to cover the costs of prescription drugs that treat physical conditions that are also treatable by much less expensive comparable drugs that have lost their patent protection? Could it be because the PBMs also receive compensation from the manufacturers of more expensive patented drugs in return for their products being included in the drug formularies of the prescription drug insurers that engaged them? The obvious conclusion seems to be that the prescription drug insurers retain the services of the PBMs not because of the complexities in devising their formularies, but rather because they simply want to conceal the under-the-table machination that take place among the manufacturers, distributors and insurers of prescription drugs.

This brings me to my recommendation that our nation’s healthcare system could be made far more efficient and could accommodate the needs of ALL U.S. citizens by minimizing (or even eliminating) the private healthcare insurance industry. That’s because eliminating the almost 30% of all healthcare expenditures that are used to accommodate the requirements of the private insurers may be the best and fastest way to address the fiscal problems bedeviling our nation’s healthcare system. This suggestion, however, might be considered Utopian as it can only be implemented by an act of Congress; and the healthcare providers and prescription drug manufacturers, together with the private insurers that fund their operations, have figuratively (if not literally) bought and paid for a significant number of the members of the Congress through their campaign contributions. This is what stymied the Clinton administration in 1993 when it tried to replace private healthcare insurance with a government funded system.  

Nevertheless, minimizing the roles of healthcare and prescription drug insurers today may no longer be a Quixotic undertaking. This could be achieved by having Congress create a government-owned-and-controlled healthcare insurer which would compete with the private healthcare insurers and thereby ultimately force them to severely limit (if not terminate) their role in financing healthcare costs. This approach was proposed by the Obama administration in 2010 as a provision in the bill that led to the adoption of the Affordable Care Act. Although that provision had to be abandoned when Senator Ted Kennedy died, it did come within one vote in the Senate of being adopted. 

Admittedly, any legislation designed to undermine the private healthcare industry will continue to be opposed by the “usual suspects” who will argue that this is a plan to bring “socialized medicine” to American. Americans have always rebelled at the thought of government control. In fact, this was the major selling point of the “Reagan Revolution” which rebelled against the increasing government control of commerce ushered in by the administrations of Franklin Roosevelt and Lyndon Johnson. While the thought of socialized medicine was sufficiently frightening to stymie the previous efforts to nationalize our healthcare system, the economic duress under which our healthcare system is currently operating may make such legislation now possible.

Annual healthcare costs in the U.S. currently total approximately $1.9 trillion (or 18.4% of the nation’s total expenditures) and that percentage is projected to reach 19.8% by the end of this decade. Partially, underlying this projected increase is the fact that the U.S. population is aging and that Americans over the age of 65 currently represent 18% of our population. By 2030 that percentage is projected to increase to 20.6% and to 23% by 2050.  A further problem is that healthcare issues increase dramatically with age. Individuals over the age of 65 already incur 40% of our nation’s healthcare costs and as health science progresses the percentage of healthcare costs will increase even without the percentage of those over the age of 65 increases.  

For the past 45 years our federal government has been able to meet its share of the nation’s rising level of healthcare expenditures by further increases in the national debt which has now reached $38 trillion. As a result, annual interest payments on that debt have increased to $1.2 trillion or almost 23% of the federal government’s $5.23 trillion in annual revenues. Stated succinctly, the federal government’s healthcare and debt service expenditures together now represent over 50% of the annual revenues collected by our federal government and that does not even taken into consideration the $1 trillion it spends each year each year to fund the Defense Department. In short, this is a fiscal path that is no longer sustainable.