In 2020, the most recent year for which full 12-month statistics are available, the U.S. healthcare sector accounted for 19.7% of the national GDP. With the American public, industry, and government burdened by mounting healthcare expenses, policymakers are examining myriad proposals to save on healthcare costs. These recommendations range from targeted and incremental measures to major restructuring to a single-payer system for the entire population, generally envisioned as “Medicare for all.”
- U.S. healthcare costs are increasing faster than the GDP is—they will be almost 20% of the GDP by 2028.
- Cost-cutting ideas range from price transparency to a single-payer, Medicare-for-all plan.
- Private insurers switching to a Medicare fee schedule would save $350 billion in 2021.
- Medicare-for-all would cost less than current systemwide healthcare expenditures.
- Health-sector consolidation is prompting calls for stronger antitrust enforcement and stricter patent laws.
The Politics of Healthcare
Since the enactment of the Affordable Care Act (ACA) and the implementation of its subsidized insurance market, the need for government action has become more accepted, or at least discussed. However, the California v. Texas litigation contesting the ACA's constitutionality is pending ominously before the U.S. Supreme Court.
The conflicting interest groups that would be affected by changes to the healthcare system possess great economic and political power. They range from independent private practitioners to pharmaceutical giants and integrated insurance and provider conglomerates to the hospital systems that occupy important positions of influence in every Congressional district. Thus, even minor reforms confront substantial resistance.
President Joseph Biden‘s campaign platform set out an ambitious healthcare agenda, including adding a "public option," a government-run, public health insurance plan, to the ACA offerings. The platform aimed to tackle market concentration and cut drug prices by allowing Medicare to negotiate prices. It supported imposing controls on new drugs with no competitors and on abusive pricing of other drugs. It proposed allowing Americans to buy prescription drugs from other countries, as well as increasing access and affordability through premium tax credits and other benefits. The Biden program intended to reduce maternal mortality, end restrictions on women’s reproductive care, advance mental-health parity, and increase support for community health centers.
However, President Biden, with slim Democratic majorities in both houses of Congress, has not presented his entire campaign healthcare program in his initial legislative proposals, despite pressure from the more liberal members of his party. Although he has proposed tax-based assistance for insurance premiums and home care—as well as more support for Veterans Administration (VA) hospitals—President Biden has not included his campaign’s major healthcare initiatives in his formal infrastructure and family assistance plans.
Meanwhile, proponents of the ACA urge enhancing its insurance markets and coverages and expanding Medicaid, particularly to states that have not elected the ACA’s Medicaid incentives. Many business leaders—who have tried to reduce costs by adopting value-based payments, increasing employee cost-sharing, offering wellness incentives, and other measures—are finding their efforts to be marginally effective at best. And a surprising number who would
ordinarily reject any government intervention appear ready to support government action to reduce spending.
Recognizing that Medicare operates at a lower cost than private insurance does, healthcare economists have studied the adoption of its payment structure and evaluated its potential for transformation into a broader system as methods for reducing national healthcare spending. The lower rates paid by Medicare, if extended to more providers, would result in savings. If Medicare rates were used for private insurance reimbursement, the reduction in spending would be an estimated $350 billion for 2021 alone. More and more frequently, this major restructuring is proposed as a single-payer system.
Conversion of the Medicare program to a single-payer, Medicare-for-all program has support from major political figures, but the complexity of switching from the current system and the political impediments it would need to overcome make its adoption unlikely. If a single-payer system provided the present Medicare benefits and cost-sharing structure, it likely would result in significantly lower spending than that of present levels because Medicare pays for services at lower rates than private insurance does and bears lower administrative costs.
Different designs for a single-payer system, all of which are generally variations on a Medicare-for-all system, produce higher or lower savings depending on their features. If the Centers for Medicare & Medicaid Services (CMS) were given the authority to negotiate drug prices with pharmaceutical companies, a power that Medicare currently lacks, additional savings would be expected. However, it should be noted that many single-payer proposals would provide more generous benefits than the current Medicare program would. By providing richer benefits, such as dental, vision, hearing, and long-term care—and by lowering or eliminating cost-sharing by beneficiaries—these more comprehensive proposals would save less. And, if especially generous, these alternatives could cost more than a system more closely modeled on the current Medicare program would.
Alternative models: CBO, Urban Institute, and RAND studies
The Congressional Budget Office (CBO) has compared the economics of a comprehensive, single-payer system to those of the status quo. The CBO found that a comprehensive Medicare-for-all program could reduce overall health spending while providing universal coverage, bolstering revenues for clinical services, and eliminating most copayments and deductibles. CBO experts evaluated five alternative structures using different assumptions about provider payments; enrollees’ copays; demand for services; coverage of long-term care, vision, dental, and hearing services; and the impact of a single-payer, governmental plan on Medicaid and other government programs.
The CBO estimated that spending would fall even as healthcare utilization rises because the single-payer system would involve simpler, less costly administration than the present system does with its multiple private insurers and wide variety of plans. The CBO analysis emphasized that the present Medicare system spends only 2% of its revenues on administration, while private insurers spend approximately 12% on administrative overhead.
The Urban Institute and RAND have also published studies about the cost and coverage effects of changes to the present system. The Urban Institute evaluated six plans to add, incrementally, to the changes made by the ACA and also considered two single-payer alternatives, one a “lite” version and the other a more comprehensive plan closer to the system studied by the CBO. RAND evaluated a comprehensive, single-payer system proposed by state legislators for New York State.
Differences in the assumptions and methodologies used by the three organizations hinder a direct comparison of their “comprehensive” studies with each other and with current national expenditures. The comprehensive plans evaluated by the Urban Institute and RAND covered more services than are provided under Medicare currently. Their plans were also more generous than all but the most expensive of the five alternatives considered by the CBO.
The Urban Institute and RAND concluded that the cost for their richer models would exceed total national, current spending. However, the extent to which any excess may be attributable to their broader range of services is unclear. In addition, the CBO has noted that the three studies relied on critically different assumptions about administrative costs. Though the CBO generally assumed administrative costs would be consistent with Medicare’s current low rate of administrative expenses, the Urban Institute and RAND analyses were based on higher rates that were closer to those reported at present for private-sector plans.
Lower age for Medicare eligibility
With the American Families Plan, President Biden has proposed several changes to Medicare, including giving individuals the option to enroll in Medicare at age 60. Many Democrats support this proposal. It would shift costs from private insurance to the Medicare program. Because Medicare rates are lower than private insurance rates, transferring people to the Medicare system would likely produce a net reduction in overall healthcare spending.
Potential Targeted Savings Measures
Besides major restructuring of the healthcare system, researchers are also investigating targeted savings measures that will reshape some elements of the system with the aim of reducing costs. Here are five broad areas they have explored.
Americans pay far more for prescription drugs than those same drugs cost across the border in Canada and in most other countries. Recognizing the impact of drug pricing on both private- and public-sector costs, policymakers have considered various approaches to reducing Rx costs.
U.S. drug prices far exceed those of Canada's and other countries’ rates...Critics discount the claim of large pharmaceutical companies that R&D requires high prices...Pharmacy benefit managers’ lack of transparency prompts criticism...The Biden campaign supported legalizing foreign drug purchases and Medicare negotiation of drug prices.
Pharmaceutical company practices. Recommendations for reducing drug prices include laws and regulations that would directly affect pharmaceutical-company pricing and would authorize Medicare to negotiate to reduce prices for its beneficiaries and potentially lower costs throughout the drug market. Also, critics of pharma behavior discount industry arguments that drug companies’ investment in research and development (R&D) necessitates high drug prices. They recommend that legislators and regulators ban questionable market practices, such as anti-competitive "pay for delay" agreements to prevent or delay the introduction of lower-cost generic drugs and biosimilar drugs.
Additional reform proposals include patent-law changes—for example, limiting secondary patents that have no effect on a drug’s safety or clinical efficacy; restricting the granting of multiple, related patents. Also studied: stricter qualification rules for—and limiting some benefits of—orphan drug status; implementing more efficient approval processes; and adopting pricing regulations that recognize government funding supports the development of some drugs.
The role of pharmacy benefit managers. Critics of high drug prices also question the conduct of pharmacy benefit managers (PBMs). PBMs serve as intermediaries, negotiating payment rates for prescription drugs on behalf of insurers and their networks, employers, and other plan sponsors. Increasingly, observers question whether PBMs are fulfilling their primary purpose, which was to use the market power of their large clientele to reduce drug pricing for plan members. Economic and policy analysts have focused on the role played by these intermediaries and are challenging PBMs’ current practices and impact.
PBMs’ operations, the prices they negotiate with drug companies, and their allocation of costs and savings lack transparency. Without transparency, it is difficult, often impossible, for plan sponsors to understand how their payments are directed among the PBMs, drug companies, and pharmacies comprising their networks. Some critics further allege that the creation of drug formularies (i.e., the specific drugs and pricing available to plan members) may be affected more by PBMs’ and drug companies’ profit goals than by drug quality and efficacy. The concentration and market power of PBMs—with three companies controlling more the 80% of the market—have raised antitrust questions about both vertical and horizontal integration involving PBMs and other players in the healthcare and insurance sectors.
Some policy analysts have promoted better consumer education as an approach to reducing U.S. healthcare spending. Transparency has been promoted to encourage consumers to choose less-expensive providers. However, because most consumers are covered by private or governmental plans that establish the rates paid to their in-network providers and generally set standard cost-sharing formulae for plan members, consumers’ need for and use of specific pricing information is most important for services receiving no or very limited insurance coverage—for example, dental services, hearing aids, eyeglasses, and fees charged by out-of-network providers. Recent federally mandated hospital price disclosures have had limited utility because of the complexity of thousands of billing codes, technical language, and inconsistent presentation on hospitals’ websites. Thus, transparency assists consumers in purchasing a narrow range of services but seems unlikely to deliver significant, direct cost containment.
What healthcare price transparency can do, however, is help the healthcare sector develop a more rational and equitable economic structure. Transparency has facilitated more and better systemic studies. It provides substantive information to policymakers and analysts from extensive data collections that help them to understand the present system and to evaluate policy changes. Transparency does raise a potentially problematic question that needs to be considered: Might disclosure of the negotiated rates of providers facilitate anti-competitive behavior in some
markets and lead to increased costs as lower-cost providers seek higher fees from insurers? Preventing abusive practices while reaping the benefits of transparency is imperative.
Increased consumer cost-sharing
It was widely thought that increases in consumer cost-sharing—through higher insurance deductibles and copays—would discourage unnecessary services, motivate consideration of costs versus benefits, and reduce expenses, particularly for employers. A study of the effect of increased out-of-pocket costs on consumers indicates, however, that consumers are generally unable to evaluate costs against benefits with respect to medical care. More concerning is that researchers have found that when faced with higher personal expenses, individuals forgo treatment indiscriminately, without regard to whether it has a high or low benefit.
Tackling waste and inefficiency
Waste has been estimated to constitute as much as 25% of healthcare spending, ranging from $760 billion to $935 billion. But identifying waste and addressing it have been elusive. A broad, vague category, waste has been described as including overtreatment, inappropriate pricing, failure in healthcare coordination or delivery, administrative complexity, and fraud and abuse. Focusing more on inefficiency than on ill-defined waste might be a more productive approach to containing costs.
Metrics: volume versus 'value'
Similarly, emphasizing value in healthcare, rather than volume (i.e., the number of services) entails reconciling different definitions of value and assessing cost versus quality. Stressing different metrics can lead to different and possibly unfortunate results. A Medicare effort to reduce hospital readmissions by lowering payments to hospitals with high readmission rates reduced these rates to a limited extent. A review of this program, moreover, underscored the need to anticipate the potentially harmful effects of well-intended changes in policy or practice. Some studies of this Medicare program (but not all) indicated it also was associated with an increased risk of death.
Prospects for Future Savings
Serious concern about the increasing cost and share of the U.S. GDP represented by healthcare spending has prompted extensive research and numerous proposals for reducing these costs—or at least tempering their current rate of increase. The complexity of the healthcare sector and the power of diverse private interests make any change challenging and politically difficult.
The urgency felt by both the public and government officials will keep the problem high on the public policy agenda. The growing enthusiasm for the ACA’s coverage and payment reforms may increase support for governmental action. Targeted and incremental changes would likely be more acceptable than a wholesale restructuring or a single-payer system. With cost reduction as the essential goal, changes affecting patients, providers, and payers will inevitably entail conflict and resistance.