I was working on a post about the healthcare system. All was moving along nicely until, as if by coincidence, Ezekiel J. Emanuel (Rahm’s physician brother) posted an op-ed in the Washington Post, covering much of what I wanted to say and providing me with an ideal “hook”. Here’s his opening statement:
Democrats succeeded in elevating health care affordability to the top of the national agenda during the shutdown fight. Indeed, they forced President Donald Trump to offer proposals — albeit wrongheaded ones — under the rubric of affordability. Count that as a win.
But simply defending the Affordable Care Act does not a health plan make. About 150 million Americans have employer-sponsored insurance, where a family plan now costs workers an average of nearly $7,000 per year from their wages and $27,000 in total — the equivalent of a new Toyota Corolla every year. Half of Americans worry that they cannot afford health care. Congress — and the American public — desperately need new ideas.
While Trump and the Republicans dither, Democrats can seize the advantage and craft a more comprehensive health care affordability bill. These five reforms can be immediately implemented to control costs…
His five points are:
- Change hospitals’ incentives with price controls
- Change physicians’ incentives by changing to a capitation system
- Change insurers’ incentives by forcing them to compete
- Change pharmaceutical companies’ and PBMs’ incentives with price controls
- Reduce administrative costs through standardization
Read the whole thing. If you are a close reader, you may notice the connecting thread among these proposals.
Democrats are shrewd in chiding Republicans for having no plan for healthcare. Dr. Emanuel has said, as they say, the quiet part out loud: Democrats have no plan, either, at least not beyond extending the ACA and the COVID emergency subsidies indefinitely.
Unfortunately, I’m afraid it’s vanishingly unlikely that we will see any sort of real reform along the lines proposed in the op-ed. I say that with confidence based on experience. Sustainable Growth Rates were approved more than 25 years ago. Their biggest failing was that, if Congress had the courage to stick with them, they might have worked. When they at long last repealed the requirement a few years back, the jig was up. There will be no plan for reducing costs forthcoming from Congress..
We do not have a healthcare system. We have a rent-seeking system. In 1965 the federal government spent less than $3 billion per year on healthcare. Today we spend almost $2 trillion per year. The percentage of GDP represented by the healthcare sector has risen from around 5% to around 17%. There is no metric that shows Americans’ health improving commensurate with that increase in spending. Yes, there have been marginal improvements. At least until 2010 when gains in life expectancy slowed dramatically. The reason is simple.
Not one of Dr. Emanuel’s proposals is a new idea. We have known that the fee-for-service system was a problem since back when Harry Truman was president in the findings of the Hoover Commission. Standardization could have been implemented at any point during the last 60 years with obvious benefits.
Today LLM AI has the potential to increase the productivity of our healthcare system substantially at a lower cost. That could be facilitated by regulatory reform and applications being approved on an accelerated basis by the FDA. Unless that is done in a way that disrupts the present system it will suffer the same fate as previous attempts at reform.
A lot of right and a lot of wrong here. Life expectancy in 65 was 70 and now it’s 79. Some of that is due to less smoking but our obesity/diabetes rates are way up. Well beyond that what people are generally unaware of is the increase in functionality. All of those stories about 60 being the new 50 and people in their 70s and 80s remaining active? A lot of that is due to the increase in functionality achieved by medicine. In 65 you routinely died from stuff we easily treat now or you remained disabled. That elder parent who now remain independent due to her cataract surgery and hip replacement doesnt require someone to stay home with them.
The important question is why do we pay more than other countries and you zeroed in on that. Its many things but on the payment side it’s our private health insurance system. KFF runs an analysis every few years and if all medical expenses were paid at the rate Medicare pays our national expenditures on health care would decrease by about 40%. That would put us about in the middle of other OECD countries and lower than Switzerland, Sweden, Belgium, etc. What we have is a failure of our private health care system to control costs. Is that rent seeking? I am honestly not sure how rent seeking applies to private entities. The issue is not so much the political class not controlling Medicare spending but our other spending.
You are correct that as you mostly note in your graph that essentially everything in our medical care costs more than elsewhere. (Generic drugs are an exception.) We tend to concentrate on whatever area is the topic of the moment but it’s pretty much everything. AFAICT the largest discrepancy is in administrative costs. Depending upon the study that is 4 to 5 times higher in the US. A lot of that is the result of our private insurance system and also our tort system.
Anyway, this is too long. To finish, medicine is adopting AI but it’s not that reliable yet and it still isn’t good at acting independently. I am skeptical that approving drugs faster will affect costs much. The US already approves faster than just about any other first world country and ours are the most expensive. The way drug companies now price many of their blockbuster drugs is not related so much to R&D or production costs but rather based upon what the alternatives cost. Look at the Hep C drugs that cost so much. They based that upon the alternative costs of care if the drug was not available. That was cheaper so the insurance companies, mostly, paid.
Steve
“Incentives are superpowers.” – Charlie Munger
I think our current healthcare system has a lot of issues. I think most of these are related to the incentives or lack of incentives in our current systems. One thing I agree with Robert Kennedy about is that America does not have a healthcare system, we have a sick care system. Ultimately, we desire good health above a good treatment system. Ideally, a good treatment system leads to good health.
How are our incentives?
Do people on government insurance (Medicare/Medicaid) have an incentive to get a lower price? No
In our current system, do people have an incentive to lose weight, eat healthy food, stop smoking, or exercise? Overall, no (perhaps a small incentive to stop smoking based on insurance rates).
In our current system, do doctors have an incentive to treat people or cure people? The financial incentives are for treatment.
Do ACA insurers have an incentive to reduce costs? No, they are guaranteed a minimum profit margin which means higher expenses give higher profits.
Do doctors have an incentive to to minimize excessive testing to manage costs? No. Their incentive is to run extra tests to minimize lawsuit risks.
Do private health insurers provide incentives to minimize time of patients to get treatment with local care? No, they don’t work for the people insured, but the employer who pays the bill.
The list could go on. The incentives are all wrong.
Medicare has a 20% co-pay so people do have incentives to seek lower costs, they just dont care that much. Note that secondary insurance exists but if you are actually sick and use it a lot you pay more or may not be able to find some.
People do have many incentives to eat well and exercise. You look and feel better and make more money. AFAICT insurers in the ACA are not guaranteed profits more than any other insurance companies have ever been. Many insurance companies left the ACA market because they lost money. You may be thinking of the medical loss ratio (MLR). That just refers to the amount of money insurance companies collect that they can spend on stuff other actual medical care like admin and profits.
Doctors, like mechanics, electricians, lawyers or almost any profession have always had the incentive to provide care that was not truly needed. That has been diminished since so many are now employed. Still happens but you also have insurance companies who have the incentive to crack down on not needed care. They do this but then we also see extremes the other way. You had United Healthcare, the company whose CEO got shot and killed, denying payments for emergency trauma care because people didnt get pre-authorization for their car accident or getting shot. So there are actually lots of incentives to control costs and incentives to increase spending. What we see is that on the private insurance side those incentives balance out to it being more costly than Medicare.
Steve
I’m a day late and a dollar short. Here is a link that may or may not be insightful (or inciteful): https://charleshughsmith.blogspot.com/2025/12/why-healthcare-is-in-death-spiral.html Except for personal experience, I am not very knowledgeable about the subject.
@steve
Doctors, like mechanics, electricians, lawyers or almost any profession have always had the incentive to provide care that was not truly needed. …
I agree. I may be naive, but I find most people try to do the right thing. Doctors are no exception. Most of my doctors want testing and imaging to get the best diagnoses, and most patients want the same. It may prevent lawsuits, but absent lawsuits, most doctors would not change.
“KFF runs an analysis every few years and if all medical expenses were paid at the rate Medicare pays our national expenditures on health care would decrease by about 40%. That would put us about in the middle of other OECD countries and lower than Switzerland, Sweden, Belgium, etc. What we have is a failure of our private health care system to control costs.”
That would be amazing if true. I looked up the most recent study I could find (2021), and that’s not what it says.
https://www.kff.org/medicare/limiting-private-insurance-reimbursement-to-medicare-rates-would-reduce-health-spending-by-about-350-billion-in-2021/
The 41% decrease is not total healthcare spending, but the privately-insured group in the study, which would fall from $859 billion to $507 billion, a $352 billion drop. That’s a lot of money! But it only reduces total healthcare spending by 1.5% of GDP. From the study:
“Health care expenditures are projected to account for 18% the United States gross domestic product (GDP) in 2021. Shifting private insurance to Medicare rates would decrease this by about 1.5 percentage points, making the share of GDP spent on health care 16.5% of GDP. This would still be a far higher amount than comparable countries spend on health care, which ranges between 9% and 12% of GDP.”
And they note the limitation of this estimate:
“We did not estimate the impact a reduction in aggregate health care spending would have on the labor market, employee compensation, and employers’ decisions to offer coverage. We also did not estimate how lowering health care prices would impact the market for health care services. Any changes to the prices paid for services may have other effects on health care in the United States. For example, lower reimbursement rates could decrease the number of practicing physicians or cause hospitals to contract or close. Lower reimbursement could also decrease investments in new technology. Lowering prices could also increase demand for care (particularly for those with high deductible plans). The potential combination of reduced supply and increased demand could impact access to care, health care quality and net health care spending.”
The WSJ had an article today on the fraud in the Obamacare plans that I thought was useful:
https://www.wsj.com/opinion/obamacare-is-a-mecca-for-fraud-96fe6c29?st=cfGrPY