Can the U.S. Health Care System Be Fixed? – History, Problems & Solutions
“I have to tell you, it’s an unbelievably complex subject . . . No one knew that healthcare could be so complicated,” explained President Donald Trump to Republican governors attending the 2017 National Governors Winter Conference. Many consider the President’s comment the understatement of the year due to the uneven, often unintentional evolution of health care in America.
While there are still things you can do personally to reduce the cost of healthcare, the latest political effort to fix one of the more inefficient and most expensive health care systems in the industrialized world. After promising for seven years and voting more than fifty times in the last four years to repeal the Affordable Care Act (ACA), the Republican majority in the House of Representatives could not agree on a replacement plan. As a consequence, the ACA – with all of its strengths and weaknesses – will continue.
If you’re wondering how we got here, you’re in the right place. In the following sections, we’ll cover the history of healthcare in the U.S., previous reform efforts, common debates, future solutions, and more.
Today, the country spends $3 trillion annually on healthcare or $9,523 per person. According to consulting firm Deloitte, America spends more per capita on healthcare than any other country in the world – more than 2.5 times than the U.K., 1.8 times the rate of Germany, and 1.6 times the amount Canada spends.
At the same time, the U.S. healthcare system ranks near the bottom of third-party rankings for objective measures like access, efficiency, and effectiveness. For example:
A 2016 study by The Guardian concluded: “Though the system fosters excellence and innovation in places, the messy combination of underinsurance and overinsurance has left the U.S. with the highest healthcare costs in the developed world and some of the worst overall health outcomes.”
America was one of the last industrialized nations to have comprehensive health insurance for its citizens. Germany introduced compulsory “sickness” insurance in 1883, followed quickly by Sweden, Denmark, Austria, Hungary, Norway, Britain, France, Switzerland, and the Netherlands by 1912. Their systems eventually evolved into universal health care systems under a centralized government control.
While some reformers advocated for a similar program in the United States, support for a national system was tepid, even among the working class. Despite sporadic campaigns to introduce compulsory health insurance, they were defeated by opponents, including:
According to the Pittsburgh Post-Gazette, most citizens were not worried about the cost of medical treatment since most health care until the late 1930s occurred in the home, even surgeries and births. Midwives typically delivered babies until the introduction of anesthesia, even though birth mortalities were high. Medical treatment was crude by today’s standards and most hospitals were “mental wards and homes for the indigent, operated by nurses and nuns, treating only specific ethnic or religious groups.”
A variety of different factors created the foundation for widespread health insurance coverage in the 1930s and early 1940s and its delivery through private employers. Most people paid for medical care out of their own pockets.
The forerunner of modern healthcare insurance was a contract between 1,500 Dallas-area school teachers and Baylor Hospital in which the former agreed to pay premiums for up to 21 days of future care. The 1929 plan was called “Blue Cross” and was followed by “Blue Shield,” a similar program to cover physician fees.
About the same time, other groups began offering prepaid plans for employee health coverage, primarily for accidents on the job. They included:
Before the 1930s, pathogenic bacterial infections killed hundreds of thousands each year. With no effective medicines, human suffering was great, particularly among children with immature immune systems. Of the 620,000 deaths in the Civil War, two-thirds died from wound infections.
The discovery of penicillin by Alexander Fleming in 1928 and sulfa drugs by Gerhard Domagk in 1935 replaced ineffective home remedies and changed the practice of medicine. According to The Journal of Trauma Injury, Infection, and Critical Care, American deaths from abdominal and chest injuries in World War II had fallen to 24% and 10% respectively.
The combination of new drugs, anesthesia, and medical advances such as blood transfusion techniques and improved X-ray equipment encouraged people to go to physicians for treatment that had previously been provided by home remedies and care.
Due to the Great Depression, most people had difficulty paying medical bills. People went to hospitals for outpatient care with the limited use of inpatient beds. As a consequence, many voluntary hospitals closed their doors.
To control inflation during WWII, Congress passed the Stabilization Act capping wages and prices. As a consequence, large employers and labor unions negotiated insurance plan benefits to compensate for the fixed wages. Since the cost of the insurance resulted from negotiation between company and union, the costs were deductible as a business expense while the premiums were not considered taxable income for employees nor included in the Social Security payroll base.
According to the Monthly Labor Review, less than 10% of the population was covered by any health insurance; by 1950, one-half of the population had insurance. Employer-provided health insurance became the foundation of the American healthcare system today.
In 1949, businesses introduced major medical insurance with cost-sharing by employees through deductibles and co-pays. In 1951, 100,000 employees and their dependents were covered by such plans; that number had grown to 156 million by 1986.
Healthcare insurance pioneered by the not-for-profit “Blues” (mutual insurance companies owned by the policyholders) dominated healthcare insurance through the 1950s. Commercial (for-profit) insurers did not initially consider health insurance to have definite, measurable risks, nor any assurance of profit and ignored the market. However, following the examples of the Blues, they quickly entered the market.
Their competitive advantage was the use of an “experience-rating” approach, enabling them to reduce premiums by covering a healthier-than-average group of employees. By contrast, the Blues were required to link their premiums to a broad geographic community, rather than a select group. The discretionary approach provided two competitive advantages to commercial insurers:
In 1941, 51% of those with healthcare insurance had a policy with a Blue Cross Blue Shield (BCBS) plan; by 2015, their market share had fallen to 41%.
As the BCBS non-profit plans found it difficult to raise capital for strategic initiatives, many transitioned to for-profit, publicly traded organizations in the early 1990s. Today, the largest Blue Plan (Anthem) is publicly traded and the second largest health insurer in the nation.
According to Wendell Potter of the Center for Media and Democracy’s PR Watch, profits and not-for-profits behave similarly, racking up enormous profits and surpluses.
As the cost of health insurance increased, many large employers turned to self-insurance, relying on the insurance companies for physician and hospital contracting and claims administration.
Secretary of Labor Thomas Perez reported to Congress in 2015 that there were 20,600 self-insured plans in 2012 covering 32 million workers, a slight increase from the year before. The ACA provisions do not apply to these plans as they are considered the result of labor negotiations, not public policy.
In 1993, the average medical loss ratio (MLR) – the dollars paid for medical claims or healthcare premiums – for the health insurance industry was 95%. Over the next decade and a half, administrative costs and profits accounted for a growing share of premiums. As a consequence, the ACA required health insurers to maintain a minimum MLR of 80% or rebate portion of the premiums to policyholders. From 2011-2015, rebates exceeded $2.4 billion.
As a consequence, Potter claims, “Health insurance is one part of the U.S. economy where the free market works beautifully for the insurers and a few executives (and shareholders of for-profit companies) but horribly for the rest of us.”
The 1943 Wagner-Murray-Dingell Bill called for compulsory national health insurance funded by a payroll tax. It failed with opponents claiming it was an arm of the International Labor Organization (ILO) created after World War I. According to the American Journal of Public Health, an anonymous article circulated in the Medical Economics magazine claimed that the ILO had plans to socialize medicine throughout the world, “one nation at a time.” The bill was subsequently reintroduced every session for the next fourteen years but failed to pass.
President Harry Truman favored a compulsory national health plan but was unable to get a Congressional hearing on the proposal due to organized opposition from the American Medical Association, the American Hospital Association, and the American Bar Association. The AMA claimed that passage of a national plan would make slaves of doctors and questioned, “Would socialized medicine lead to socialization of other phases of life? Lenin thought so. He declared socialized medicine is the keystone to the arch of the socialist state.”
While Medicare for elderly citizens passed in 1965, no significant efforts to promote a national system of health insurance occurred until the election of President Bill Clinton in 1992. Opponents of the Clinton proposal included the Heritage Foundation, who claimed that:
According to a study by Harvard University’s Derek Bok, opponents collectively spent over $100 million on ads ($167 million in 2016 dollars) on the healthcare debate. The University of Pennsylvania’s Annenberg School of Communications found 59% of the ads misleading with claims of “involuntary euthanasia,” loss of choice of doctor, and “no access to health care.” Major health care reform failed once again.
The debate over healthcare became especially vociferous in the early 21st Century. Democratic President Barak Obama introduced the Patient Protection and Affordable Care Act (ACA) in July 2009. The Act was based upon the healthcare program passed previously in Massachusetts by a Republican Governor and initially developed by a conservative think tank, The Heritage Foundation.
The Massachusetts Plan included:
The Act became law in 2010, with votes along political party lines (all Republican members of the House of Representatives voted against the bill). A significant element in the selling of the Act to the public was the President’s promise: “If you like your private health insurance plan, you can keep your plan. Period.”
Provisions of the Act included new regulations such as new minimum coverage requirements (required coverage for pre-existing conditions, for example). As a consequence, many of the existing insurance plans for individual purchases did not meet minimum standards. Some insurance providers subsequently left different markets or raised premiums substantially.
While the ACA added millions of Americans to the insured rolls, it has been less effective in cutting the increasing cost of healthcare for the average citizen. According to the Congressional Budget Office, the average premium paid by a family or a single person more than doubled between 2001 and 2014, a rate exceeding growth in per capita income. Employers reacted to the increase in either cutting plan benefits or raising premiums, deductibles, and co-pays on employer-provided insurance (the Milliman Medical Index calculated that the average cost of annual health care for a family of four was $25,826 in 2016).
Opponents of the ACA assert that there is “overwhelming evidence that Obamacare caused premiums to increase substantially.” On the other hand, proponents claim that the ACA has been moderating premium rates that would have occurred without the Act. Brookings Institute researchers Loren Adler and Paul Ginsberg found that individual premiums were 10-21% under the premium projections before that Act.
Over the last six years of Obama’s term, Republicans attempted more than fifty times to repeal the Act. With the election of a Republican President in 2016, Republicans have repeatedly vowed to “repeal and replace” the Act during the first 100 days of the new President’s term. The question is what, if anything, will replace the ACA?
As the new Administration has discovered, reaching a political consensus on how best to provide Americans with high quality, accessible healthcare at a reasonable cost is difficult, if not impossible. The following factors will affect all proposed solutions.
Healthcare costs increase dramatically with age. According to research published by the National Bureau of Economic Research, annual costs for the elderly are approximately four to five times those of people in their early teens. Personal health expenditure also rises sharply with age within the Medicare population. The oldest group (85+) consumes three times as much health care per person as those 65–74, and twice as much as those 75–84.
Since 1957, birth rates have fallen from 3.7 births per woman to 1.9 births, below replacement level (the number of children needed for a couple to replace themselves). As a consequence, the median age of Americans has increased from 29.5 years in 1960 to 37.8 years in 2015. The U.S. Census Bureau projects that the population aged 65 and older will surpass the population under the age of 18 in 2056.
As a consequence, the demand for healthcare will continue to increase significantly over the next quarter-century. This financial pressure will result in changes in the funding and benefits of Medicare – the primary payer of healthcare costs for the elderly – in the future.
According to The Hastings Center, medical technology contributes 40% to 50% to annual healthcare cost increases. Since technology has provided “vaccines, antibiotics, advanced heart disease care, splendid surgical advances, and refined cancer treatments,” Congress and its constituents are loath to put any controls over its advance. “Cutting the use of technology will seem wrong–even immoral–to many [citizens].”
Perversely, medical advances leading to longevity is likely to increase health care costs by extending the years of care needed, according to some studies. This effect is evident in the current financial condition of the Medicare program. Both political parties have proposed fixes to the program, although President Trump promised no changes in his first speech to a joint session of Congress.
Since 1960, national health expenditures have grown from 5.2% of Gross Domestic Product (GDP) to 19.1% in 2016, three times as much as spent on education. The American faith in technology creates an open pocketbook for medical progress to end suffering, aging, and death, whatever the costs.
According to Modern Healthcare magazine, health care special interests spend $500 million dollars a year to influence the federal regulatory and policymaking process. In most cases, the money is well spent.
For example, the Pharmaceutical Research and Manufacturers of America (PhRMA), the American Medical Association, and the American Hospital Association rank numbers six, seven, and eight on a list of top spenders for Federal government lobbying.
Collectively, between 2008-2016, the three associations contributed more than $511 million to legislators to protect their interests, according to MapLight. As a consequence, the pharmaceutical industry receives premium patent protections and minimal control over pricing. Today, Americans pay the highest prices in the world for life-savings drugs, considerably more than in other countries for the same medicine.
The AMA has historically opposed healthcare reforms of any kind, according to the New Yorker magazine. Their opposition led to FDR’s removal of health insurance in Social Security, the defeat of Harry Truman’s universal insurance plan with the most expensive lobbying campaign that America had seen up to that time, and derailment of Clinton’s reforms in 1992. The magazine claimed doctors opposed universal health insurance because they feared government involvement would drive down fees.
Similarly, the Health Insurance Association of American, the lobbying arm of health maintenance organizations (HMOs), spent $20 million in 1992-1993 for television, radio, and print ads (“Harry and Louise”) opposing Clinton’s proposed reforms.
Business groups resist healthcare reforms, fearing that their costs will increase, while consumer groups such as AARP (formerly the American Association of Retired Persons) are equally adamant that health care services will not be reduced, nor costs of care increased.
Reaching an acceptable compromise between the opposing groups has been elusive for the last five decades and remains unlikely today.
Benjamin Franklin reflected the view of his fellow Founding Fathers when he wrote, “No man’s life, liberty, or fortune is safe while our legislature is in session.” Two hundred years later, Ronald Reagan claimed that the most terrifying words in the English language are: I’m from the government, and I’m here to help you.
A 2015 Pew Research Poll found less than one-in-five citizens felt that government could be trusted some or most of the time; a decline from 1958 when more than three-of-four had confidence in government. A subsequent poll suggested that Americans, more than any other nationality, believe that success is the result of their hard work, not forces beyond an individual’s control.
Consequently, it is not surprising that the American Enterprise Institute/Los Angeles Times 2016 Poverty Survey found that most Americans, especially blue-collar conservatives, believe that “taking care of the poor” is not a primary responsibility of government. The majority of survey respondents felt “that government programs breed dependency” since there are plenty of jobs available for poor people, but they prefer to stay on welfare.
All governments make decisions about the use of public funds, trying to balance the respective needs of the future with the present, security with opportunity, and freedom with restraint. A country’s priorities are reflected in its taxes and federal government expenditures:
Health insurers seek to ensure that their insured population reflects the actuarial assumptions behind their premium rates. In other words, they avoid a customer base that is likely to exceed their projected utilization of health care services. That is, avoiding having a higher proportion of older, sicker policyholders than expected. In such cases, medical expenses will be higher, generating lower profits and possibly losses.
Before the ACA, health insurers could individually underwrite prospective purchasers of individual policies. Today, premium variation is based solely upon the geographical location, age, and smoker/non-smoker status; neither medical history nor a pre-existing condition can affect premium rates.
To reduce the risk that only those that need immediate medical care would buy health insurance, the ACA required everyone to have health insurance or pay a progressive cash penalty unless exempted. The penalty is calculated as the greater of a flat rate or a percent of income. For example, the penalty for failing to have health insurance in 2016 was $2,085 for a family or four earning $60,000. The collected fees are used to subsidize insurance company losses that result from an unavoidable adverse selection.
According to Modern Healthcare, the penalty has not been successful in generating the required number of young, healthy enrollees to the new health insurance exchanges, creating adverse selection in the insured base of many insurers. As a consequence, many insurers withdrew from unprofitable markets or substantially increased premiums for those purchasing individual policies, further widening the gap between the penalty and the cost of insurance.
The question of whether healthcare is a right guaranteed under the Constitution or a privilege has raged for decades. While the opposing sides agree that healthcare is a “right,” they disagree about the definition of that right.
Shortly after taking office, President Trump, referring to his proposed changes to the health care system after a repeal of the ACA, promised, “We’re going to have insurance for everybody. There was a philosophy in some circles that if you can’t pay for it, you don’t get it. That’s not going to happen with us. . .[They] can expect to have great health care. It will be in a much simplified form. Much less expensive and much better.”
The public information about the Republican-sponsored Act reflected the conservative positions that:
While the details of the plan finally negotiated between the Republican House members are incomplete, news reports suggest that the new Act would:
Passage of the Act is, at best, uncertain due to Democratic resistance and the opposition of some Republicans to tax credits which they view as “a new entitlement” or “Obamacare light.” If the Act had been passed as is without amendment, the following consequences are likely:
The role of employers in health insurance will fade as they jettison insurance coverages for their employees, as they earlier eliminated pensions and off-shored jobs for greater profits.
Katherine Hempstead of the Robert Wood Johnson Foundation claims that the decline and ultimate disappearance of employer-provided health insurance is “inevitable.” The number of discontinued employer-provided plans will increase if Congress removes the tax exemption for employer-provided coverage as advocated by conservatives like Joseph Antos.
According to Robert Field of Drexel University, commenting on the [email protected] website, employees are likely to be worse off if employers eliminate health care insurance. He questions whether the money spent on coverage would be converted into increased income for employees: “Would they give you all of the money they would have given the insurance company? I think the answer is no.” Field also notes that any increase in wages would be taxable, limiting the funds available to buy insurance, even with the refundable credits provided in the Act.
Individuals transitioning from a group plan will find that administrative costs for individual plans are as much as five times greater than a group plan, according to Mark Pauley, a professor at the University of Pennsylvania’s Wharton School of Management.
Insurers, freed from the mandates of Obamacare and the oversight of State insurance commissions, will reduce premiums by excluding expensive coverages, raising deductibles, and increasing co-pays.
While policies may be cheaper, they will likely to cover fewer benefits such as maternity and pre-natal care, mental health treatments, or costly diagnostic procedures. Physician and hospital networks will become further restricted as insurers seek to lower the cost of care by negotiating lower prices in return for reduced competition.
While younger citizens may see a decline in their premiums due to age-banding, older people are likely to see significant premium increases (or vastly reduced coverages) from existing levels. As a consequence, more people will go “bare” – without coverage – by necessity.
Older Americans are disproportionately affected with premiums estimated to jump nearly 30% for a 64-year-old to $13,125 annually. They will join others who cannot afford the costs of stand-alone high-risk pools that may or may not be subsidized by State governments. This group will join those previously forced from the Medicaid rolls.
Standard & Poors Global Market Intelligence projected an additional four to six million fewer Medicaid recipients by 2024, while the non-partisan Congressional Budget Office estimates additions of 24 million to the uninsured population.
Some question whether the AHCA penalty for lack of coverage – a 30% premium increase for a year – is sufficient to encourage young, healthy people to buy coverage for any out-of-pocket cost. Unfortunately, in the real world, people get sick or injured whether or not they have health insurance. In a significant number of cases, they will require care.
Since the passage of the Emergency Medical Treatment & Labor Act in 1986, hospitals are required to provide treatment for emergency medical conditions including active labor, regardless of the patient’s ability to pay. With greater levels of uninsured, public hospitals and their funding entities – states, counties, and cities – will be stressed to breaking.
Many blame Obamacare for the growing deficit, overlooking the many taxes intended to produce revenues and the limited subsidies to those making under $48,000 annually. The Committee for a Responsible Federal Budget estimates that repeal of the ACA will eliminate $800 billion in taxes over the next ten years. The CBO projected deficit savings of $337 billion during the same period.
There are no taxes included in the AHCA, and the refundable tax credits are available to income earners up to $75,000 each year. In other words, there are no revenue sources included in the Act to offset the costs of the State Innovation Grants or the Refundable Tax Credits.
Fixing the country’s health care system is complicated, especially when we reject the experiences of other industrialized nations. Relying on free market competition to reduce premiums while ignoring the cost drivers of medical care is akin to panning for fool’s gold.
Healthcare costs are a function of provider prices and patient utilization. Reducing prices would result in reduced incomes for hospitals, physicians, and pharmacy companies, an outcome they aggressively resist. At the same time, restricting utilization might increase suffering and mortality.
There is not an easy answer. As Professor Field noted, “If there is a way to provide more coverage for less money, then [Trump has] got a brand new business line, even better than resorts and hotels.”
What do you think? Do you have healthcare coverage? Is it a right or a privilege?
Categories: Economy & Policy, Health and Fitness, Insurance, Lifestyle, Money Management
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike’s articles on personal investments, business management, and the economy are available on several online publications. He’s a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas – including The Storm.
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