Only the tiny island nation of Tuvalu outpaces Americans in citizens’ “choice” to spend on healthcare (as a share of GDP). Most Americans who seek health services, however, would rail against our use of the term “choice.” Despite most adults’ expressing approval of their own physician, many are reluctant to see a doctor due to the notoriously high costs associated with medical care. Deserved or not, blame for those costs falls on doctors, who must pursue higher incomes after incurring massive medical school debts, pharmaceutical companies who hike prices to reap monopoly profits, and hospital administrators with disproportionate growth in job prospects and salary. While these explanations hold merit, we view them as symptoms of an overarching issue in healthcare: bureaucracy and its role in eroding the patient-provider relationship.
The evolution of entitlement programs, while not the most glamorous aspect of American history, provides a valuable illustration of the US healthcare system’s untenable vitals. John F. Cogan’s The High Cost of Good Intentions traces modern entitlement programs back to their origins in Revolutionary War pension benefits for injured veterans and their widows. The 1830s saw Congress expand pension benefits to all Revolutionary War veterans and their survivors. Deeming the worst-off as “worthy” of federal government recompense, then later extending benefits to those just beyond the margin of qualification, was an ingenious vote-buying strategy for politicians and an invaluable way for bureaucrats to win government funds. New Deal programs and the World War II-era G.I. Bill shifted programs from cash to in-kind transfers, and firmly established the public’s expectation of federal government aid for less-well-off groups. This expectation laid the political foundation for our federal health insurance programs for the elderly and the impoverished, and Congress established Medicare and Medicaid.
Lacking sufficient knowledge and infrastructure to administer the programs, federal and state bureaucracies funneled money into private enterprises to process Medicare and Medicaid claims. Half a century later, we have a healthcare system where bureaucratic burdens drown doctors in paperwork and generate high physician burnout rates. Regulatory demands now require close to 60 full-time-equivalent staff per hospital (a quarter of whom are doctors and nurses), adding an estimated burden of $1,200 for each admitted patient. While the doctors drown, patients feel lost at sea. Gallup estimates that 18 percent of Americans cannot afford healthcare, and some report cutting back on food budgets to afford treatments. Patients and doctors, both motivated voters, share dissatisfaction with the system; note politicians’ recent legislative attempt to address concerns for select prescription drugs and increased premium assistance. The bill is merely a Band-Aid that fails to address the fundamental cost increases accompanying health care provision with expanded levels of bureaucracy.
The federal government matches state funding at a dollar-for-dollar minimum. Many states receive funds well above the minimum; Mississippi, for example, receives over 84 percent of its Medicaid financing from federal funds. The Centers for Medicare & Medicaid (CMS) report that current combined spending on Medicare ($900.8b) and Medicaid ($734.0b) makes up over a third of all national health expenditures, while state and local governments account for just under one-sixth of health expenditures, a significant disparity. Learning from previous politicization in veterans’ pension programs, the federal government allows states broad influence in their distribution of the funds, provided they work to prevent fraud and abuse and minimize administrative waste. Most state governments, therefore, draw up contracts with managed care organizations to address these issues, but this outsourcing creates a bundle of unhealthy incentives. One such incentive has resulted in most managed care organizations utilizing pharmacy benefit managers (PBMs), companies formed to save patients money through high-volume, low-price purchasing contracts with drug producers. PBMs earn commissions on the rebates they receive from the drugs they sell. These commissions increase the incentives to fill prescriptions with higher-priced name-brand drugs over generics. Consequently, they seldom save money for patients with high deductibles or copays, and frequently overcharge Medicare and Medicaid plans. These misaligned incentives provide a classic example of the unintended consequences of well-intentioned policy.
Centene Corporation typifies a managed care organization acting rationally under these incentives. Founded by a hospital bookkeeper in a Wisconsin hospital basement in 1984, Centene has become the largest managed care organization in the country. Centene’s share of the healthcare market derives from its status as “one of the few companies to have successfully navigated the Affordable Care Act,” according to the Governmental Healthcare tab buried in a long scroll down the “About Centene” web page. The same page shows that the lion’s share of their revenue, roughly 80 percent, comes from selling managed care plans. Before defending Centene as an innocent company working under perverse government incentives, consider its role in perpetuating such favorable incentives. When Missouri’s state legislature denied funding to a Medicaid expansion plan, Centene threatened to uproot its St. Louis headquarters and leave for another state that better appreciated their special financial needs. Fearing the political hit (5,500 high-paying jobs leaving the state would cost him both in favors and votes in Missouri’s most populous county) Governor Mike Parsons secured funding for the plan and padding for Centene’s bottom line. Centene knows its profit margin’s bread and butter comes from government funds and seeks after them.
Several states have sued Centene and its subsidiaries over artificially inflated drug prices, resulting in multimillion-dollar settlements with states including Illinois, Arkansas, Texas, Washington State, Kansas, New Hampshire, Massachusetts, New Mexico, Ohio, and Mississippi (other states’ settlements remain undisclosed). Is Centene guilty of rent seeking and extravagant investment on the taxpayers’ dime? Perhaps, but it is technically a private, for-profit institution: money matters and millions of dollars worth of state contracts matter a lot. United Healthcare’s Medicare overpayment lawsuit and Aetna’s fraudulent risk adjustments show that Centene is not alone in its adherence to twisted incentives in the private distribution of public healthcare funds.
Healthcare is big business — large enough to influence the broader economy significantly. If left untouched, CBO’s current Medicare and Medicaid spending trajectory projects more than doubling from 3.5 percent of total GDP in 2018 to 7.3 percent in 2050. As early as 2010, the CBO recognized unchecked Medicare and Medicaid spending as the most substantial threat to the US government’s budget stability. Creative solutions range from growing cash-only urgent care clinics for relatively minor, acute visits, to treating health insurance as catastrophic, a payer-of-last-resort. Making significant headway on this budgetary strain will require drastic legislative changes just to maintain the same trajectory toward price transparency. PBMs have taken small steps to reveal their rebate percentages, and recent legislation has seen some success in raising consumers’ cost awareness. These steps move us in the right direction, but price-setting organizations in healthcare markets still contribute to a discouragingly opaque healthcare system sorely lacking transparent pricing mechanisms that could give consumers greater healthcare choice. Improved transparency would help free both patients and providers from the current warped incentives and political jockeying that leave Americans holding a hefty bill over which they have little choice.
Words & Numbers: Peter C. Earle On The Death of Silicon Valley Bank
Fed Raises Rate, But Signals Potential Pause in May
Moral hazard is a fact of life. The Fed should focus on inflation.