In a prior post I introduced my view that we are not paying enough attention in the healthcare discussion to the top-line “giant cash suck” that causes U.S. healthcare costs to be over twice the per-capita level of many countries that achieve true universal coverage while delivering equal or better outcomes. In this second part, I will explore where much of this “cash gap” comes from.

Classic rent-seeking

While technically rent-seeking is any private or corporate attempt to obtain economic gain from government spending, sometimes the “rent” part is quite literal:

“Iowa’s newest Medicaid company will move into one of the priciest commercial office spaces in the Des Moines metro area — a move critics worry will siphon the financial resources needed for the care of the state’s disabled and poor.” – Des Moines Register, Feb. 11, 2019.

Ever since Iowa’s Republican governor Terry Branstad replaced the very efficient state-run Medicaid management system with privatized managers in 2016, a succession of companies has come and gone, fouling up healthcare for thousands of poor and disabled Iowans while trying to make a profit by cutting services. As noted above, the newest entrant promptly moved into high-priced digs on the government dime.

Rent-seeking in healthcare means that medical providers and payment plans (don’t call them insurers) are constantly seeking every legal way possible to maximize payouts to them from Medicare, Medicaid, and other government health programs. Medicare reimbursement rates are often near breakeven levels for healthcare providers, even the conscientiously-run non-profit rural community health center I was affiliated with for several years. Medicaid reimbursements are usually below breakeven levels for most healthcare providers, even the low-overhead community health centers. If, on the other hand, the provider can provide more reimbursable services during the same patient visit, the financial picture quickly gets better by spreading out the effect of fixed costs. [1]

I will admit being a recipient of this government-paid largesse via Medicare. The medical providers in my community know very well what Medicare will and will not pay for from the moment I walk in the door. Did I need that extra blood test or scan? I have intentionally “forgot to schedule” some recommended services, but usually I, like most people, do not grill my doctor to challenge his prescriptions. I am the classic “under-informed consumer” here, as most of us are in relation to healthcare.

My doctor’s “added services” may well be “good medical practice,” or they may well be “defensive medicine” to avoid lawsuits, or they may well be a directive from his practice’s financial manager. I don’t know, but I do know that this is a major cause of high American medical costs vis-à-vis countries that have found ways to discourage the fee-for-service motive in healthcare. Just like the bloat in Defense Department spending, when there is a pot of government money available, the “rent-seekers” will be right there trying their darnedest to get a piece of it.

Game theory in cost containment programs

An excellent recent article in the New York Times summarizes the well-intentioned attempts to control top-line Medicare costs since the passage of the Affordable Care Act as resulting in more “singles than home runs.” [2] In addition to the “rent-seeking” noted above, this is classical economic game theory. New rules, metrics and payment structures, such as “accountable care organizations” are developed, often jointly between providers and government, but the corporate healthcare eye is still focused on the accounting “top line.”

And so, the economic “game” becomes, “Given this metric (which we providers helped to define), how can we still maximize services per patient visit?” In this game, providers quickly learn how to “give up singles” and still “win the game.”

Quasi-rent-seeking by private “insurers”

When healthcare providers deal with private healthcare re-reimbursement plans, they again quickly “learn the game” as with the two examples provided above, using these (not really) “insurers” as proxies for the government in a private form of rent-seeking. Another recent New York Times article detailed how these payment facilitators have increasingly learned that creating “quasi-cartels” of “preferred provider” hospitals, physician groups and diagnostic laboratories can maximize healthcare cashflow for everyone in the chain, with ever-higher “insurance” costs passed on to company-provided medical plan subscribers. [3]

The results are the same. Healthcare cost top lines continue a steady march higher, nominally, but not practically, controlled by “private insurance.”

Profitable non-profits

Technically, many hospital systems are not-for-profit corporations, mostly due to their historical roots as related to religious organizations or county-provided community services. I have written in the past about how these “non-profit” organizations are often fronts for a different kind of profit-taking through “creative accounting.” As Amazon’s Jeff Bezos found, you can go for many years without making an “accounting profit” and yet the top-tier executives can get very rich in the process.

Cashflow is the key to corporate power, not accounting profits per se. A top executive of a healthcare provider chain making in the high six figures or more annually doesn’t really care if the organization is technically “not-for-profit” or not. Big new construction projects and high salaries across the top tier of management and provider staff are the new “corporate power indicators,” and that cashflow push is a major factor in driving up top-line medical costs.

Income inequality gaps

I have written in the past about how seemingly-benign small differences in income growth among different segments of the American workforce over the past 30 years have likely been the primary cause of rising income inequality. Worker-bee healthcare staff annual wage increases of 2% take 36 years to double, but manager/doctor raises of 7% take only 10 years to double their salaries. Add executive bonuses to the picture and the “inequality curve” bends quickly.

The smoothed history of wage increases over the last 30 years

The seemingly-nominal “extra pay bump” given to managers and providers for achieving performance goals adds up. This gap compounds and grows annually, and we can attribute a lot of top-line healthcare cost growth to uncapped manager/doctor increases in compensation.

Controlling unlimited demand

So, what can be done about relentless top-line cost increases? First, you have to acknowledge a capitalism-defying problem in healthcare, and then look at what more successful countries are actually doing.

For the first part, we are all (and I include myself no matter how much I research) “under-informed healthcare consumers.” I can refuse that prescribed medicine because it is not really needed or because I can’t afford it, but if I guess wrong, I might just die (and some do). And thus, I personally contribute to the rise of top-line costs and the profitability of CVS to get that prescription. Healthcare demand is, for all practical purposes, unlimited and unconstrained by conventional price theory economics. In short, the “free market” often fails when it comes to healthcare.

For the second part, the successful European countries have primarily limited prices increases in ways like this:

1. Pushing efficiencies into the system. Germany, for instance, requires coverage standardization across all of their employer-paid plans, much as we do with Medicare Part B plans. This has huge financial benefits filtering down to every healthcare payment claim. Fewer staff are required to sort out payments to providers because both sides know the rules. Unneeded procedures and paperwork costs are both reduced significantly.
2. True universal coverage kills the need for medical lawsuits except in the most egregious cases. Many (if not most) medical lawsuits result from fear of denied future coverage after “normal” bad medical outcomes rather than demonstrable malpractice. Other countries find that both malpractice insurance costs and costly “defensive medicine” decrease when everybody knows they will always have medical care available to them. Again, massive savings result from this reform.
3. True multi-party control over costs. Most of these successful countries require knowledgeable people across the spectrum of users, providers, researchers and economists to review proposed price increases and treatment modalities. A lot of practiced medicine (especially “alternative”) just doesn’t work beyond placebo levels, and administrators need the courage and the political backing to stop paying for waste.
4. Limitations of services. While the inability to get timely medical care is overblown as a U.S. criticism of other countries’ healthcare systems, there are good financial and medical reasons to “pace” many elective procedures and to closely monitor access. Many countries also “tier” their services. For instance, you can get government-paid dental services in the U.K. if you are willing to wait and accept basic quality levels, but many consumers choose (through private plans or cash) a higher, privately-provided tier of dental services. The same is true for many other elective services. When I lived in the U.K. my employer provided a private policy which allowed “skipping of the waiting line” for some medical services.

Regardless of which system for allocating healthcare costs you favor, it is critical that we all recognize the economic realities and examine the successful alternatives relating to escalating top-line healthcare costs.

Notes:

1. For a more detailed look at the role of the “fixed-cost dilemma” and breakeven points in healthcare costs, see this post.
2. Frakt, Austin. “’Value’ of Care Was a Big Goal. How Did It Work Out?” The New York Times, 23 Sept. 2019.
3. Sanger-Katz, Margot. “They Want It to Be Secret: How a Common Blood Test Can Cost $11 or Almost $1,000.” The New York Times, 30 Apr. 2019.