456. How to Fix the Hot Mess of U.S. HealthcareFreakonomics Radio
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- 1 Apr 2021
Medicine has evolved from a calling into an industry, adept at dispensing procedures and pills (and gigantic bills), but less good at actual health. Most reformers call for big, bold action. What happens if, instead, you think small?
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So I think the general perception is that the American health care system is just messed up. Is the American health care system as messed up as most people seem to think it is? Oh, I think absolutely. The US health system is as messed up as people think it is probably more so that Zack Cooper, he is a health care economist at Yale. I think the challenge, which makes it hard to address, is that there are pockets of amazing care and amazing innovation surrounded by a sea of dysfunction.
If there are two fundamental drivers of our broken, costly health care system, I would say it's pricing failures and inappropriate care. And that is Marty MacQuarrie. He is a surgeon at Johns Hopkins and the author of The Price We Pay What Broke American Health Care and How to Fix It. We did a national survey asking physicians across the country what percent of medical care, in your opinion, is unnecessary?
The average answer was twenty one percent. If one in five services delivered in any industry is entirely unnecessary, you'd say that's where the waste is and that's where we need to focus.
As we've noted before on the show, even doctors respond to incentives and the incentives in our health care system encourage procedures more than prevention. But it's not just unnecessary procedures that McHenry's talking about. Over the past two decades, the number of prescriptions issued in the U.S. has nearly doubled.
The disease really double?
We have a crisis of appropriateness as our health care system is becoming prolific at dispensing pills and procedures. It was also becoming a massive industry today. It includes more than 18 million workers and it's still growing faster than nearly any other sector.
The jobs have followed the money over the past two decades. The price of hospital services has outpaced inflation by an average of nearly three and a half percent each year. Before covid hit, hospital systems were making record profits. So were insurance companies, with the average American family of four paying about twenty thousand dollars a year for coverage. Many insurance firms have done even better recently as the pandemic led patients to put off non-essential care. So if you consider the primary stakeholders of our health care system, health care providers, insurance companies and patients, the big players are doing extremely well.
The stakeholders are making a ton of money except for one stakeholder, which is the patient.
The U.S. has the biggest GDP in the world and we also spend the biggest share of our GDP on health care, about 17 percent or three and a half trillion dollars a year. Among other OECD countries, the average expenditure is eight point eight percent after the US, the next highest is Switzerland at 12 percent.
Now, you could look at America's massive health care expenditure and think, how great is it that we choose to spend so much of our money taking care of ourselves and our loved ones? For all that money, we must be absurdly healthy, but we're not. U.S. rates of infant mortality and maternal mortality are shockingly high. We also have high rates of obesity, diabetes and cardiovascular diseases. Life expectancy in the U.S. does beat out Russia, India, all of Africa and parts of Eastern Europe.
But we're lagging Western Europe, Canada, Australia, Japan, South Korea, as well as Greece and Iceland. So what exactly are we getting for all those pills and procedures or maybe the better question is why do we need so many in the first place? Here's one clue. The U.S. does not spend much money on prevention. The Centers for Disease Control and Prevention, it is right there in the name. The CDC spends just one point two billion dollars a year for all chronic disease prevention activities.
That is less than four dollars per person.
So today on Freakonomics Radio, what would you do if you wanted to get better health outcomes without spending the trillions we currently spend for 50 years, we've been told by hospitals we can't give you a price. When I say the phrase health care is a right, you say what I say. That is a conversation that we have not had in America. And most health care reform calls for big, bold action. What happens if instead you think small? There isn't stuff that saves 15 percent.
It's a series of one percent steps. Is the solution to America's health care mess a one percent solution? That's coming up right after this. This is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. When the surgeon, Marty Makary, was starting out, he was a trainee at D.C. General Hospital. This was at the government run city hospital in Washington, D.C. One elevator at D.C. General was particularly busy and at one point the elevator was broken and the doors were stuck in the open position while some employee walked in there, fell and died.
And I don't mean to make light of it, but for weeks afterwards, no one had put a sign or a note or a cone or a tape do not cross or anything. And it's as if we were not learning from our mistakes.
And weeks later, somebody else fell in and didn't die, but hurt themselves. And I thought, gosh, who's in charge of this entire ship? Who's thinking about every aspect of safety and reliability at the hospital? Are we so fragmented that everyone's just doing their job, collecting their paycheck and not thinking about the entire ship?
The elevator incident stuck with MacQuarrie as a metaphor for the entire U.S. health care system.
I think we have a lot of good people working in a bad system. And if you look at the individuals, they'll often want to do what's right. But they're a part of a small fragment of health care with its own business interests.
And our system is so fragmented that the incentives are not often aligned in McHenry's earliest encounters with the medical profession.
It was not yet an industry.
Growing up in Danville, Pa.. I saw my father, a physician who treated leukemia and lymphoma patients, get hugs in the grocery store and at church. And people would come up and say, Doctor, I can't thank you enough for taking care of me or my mom. How can you not be attracted to that? And then you go to medical school and you learn more about this public trust and it's even more amazing. Then you see on the surface, you learn about Banteng, the doctor who invented insulin, selling the patent for one dollar so everybody could get it changing forever.
The life of people with diabetes. You see Dr. Salk, who invented the polio vaccine in 1954. He was told by his friends, you should get a patent on this thing. This could be the biggest moneymaker in the history of the world.
You know what Dr. Salk said? He said, no, this is the property of humanity or Salk lived a fine life, OK?
He didn't have fifteen cars and three homes, but he did very well. That was the incredible heritage of the medical profession.
Hospitals also had less allegiance to the bottom line.
When American hospitals were built, they were built with a charter, dedicating them to take care of the sick and injured, quote, regardless of one's race or creed or ability to pay. In some instances, many hospitals were built by churches. They operated in the red for decades, supported by philanthropy. Where is that today? Today you see some of the most aggressive predatory billing practices in the United States.
We've created a term called financial toxicity, which is essentially a complication of care, financial toxicity, meaning that a patient's out-of-pocket medical costs create a significant financial burden. How common is this? An estimated 20 percent of Americans are currently being pursued by a collection agency for medical debt.
In a study of Virginia hospitals, Marty Makary found that in one year, those hospitals filed 20000 lawsuits against patients for unpaid bills. The majority of the hospitals that sued were nonprofits. Now, just to be clear, about 60 percent of community hospitals in the U.S. qualify as nonprofit. But that word probably does not mean what you think it means.
Until 1969, a nonprofit hospital was required to provide care even to patients who couldn't afford it. That so-called charitable care standard was replaced with what is called a community benefit standard, which is, shall we say, a bit looser and which allows nonprofit hospitals to operate pretty much like a for profit business while enjoying tax exempt status.
In fact, nonprofit hospitals often make more money than for profits. Where does that money go? Executive salaries for one. A Forbes analysis of the 82 largest nonprofit hospitals in the U.S. found that the vast majority of them paid their top earning executive between one and five million dollars a year, with 13 of the 82 nonprofit hospitals paying their top executive between five and twenty one point six million dollars a year. And where does all that money come from? There's one key fact to appreciate that distinguishes hospitals from other businesses.
Most businesses tell you right up front what you'll pay for a given service, as we'll hear later, that rarely happens in hospitals which can leave their patients or customers really on the hook for Bill's way beyond their means.
Marty McCaffrey's study found that Virginia hospitals often resorted to garnishing the wages of the patients who couldn't pay their bills. The average amount garnished was more than twenty seven hundred dollars. The most common employers of these patients were Wal-Mart, Wells Fargo, Amazon and Lowes. So how did this happen? How do we get from a system where hospitals used to take care of people for free to one where they are docking the paychecks of people with jobs who still can't afford to pay?
Following a World War two, we had wage controls in the United States.
Larry Van Horn researches and teaches health care economics at Vanderbilt. He also founded the Center for Health Care Market Innovation.
And that's led me to a fixation on the topic of price and price transparency over the years.
OK, let's go back to those wage controls.
After the war in a tight labor market to attract labor, employers started adding fringe benefits to their compensation package. Health benefits became one of those fringe benefits.
By the way, this is not how most countries set up their health coverage during the 20th century. In Canada, for instance, employers do offer some health care coverage, but it is supplemental to what the government is already providing. The U.S. became an outlier by tying health care coverage to employment. At first, companies extended these benefits only to the top tier workers who had their wages capped. But it wasn't long before unions demanded insurance for all employees. Before World War Two, only 10 percent of U.S. employees had health benefits.
By 1955, that number was nearly 70 percent. What made this palatable for employers was a revision of the federal tax code.
If your employer pays you in the form of health benefits, it's tax exempt. They pay you in cash. You have to pay tax so that tax exempt treatment and employer sponsored health benefits really perverts the definition of insurance, the marginal incentive of how to compensate in the aggregate level of insurance that everybody has. And so it's more than just the employer being the vehicle by which we pool risk and purchase insurance. It is this government subsidy in the form of tax exempt treatment that is really pernicious.
Let me just ask you, when I say the phrase health care is a right, you say what I say.
That is a conversation that we have not had in America. At some point we're going to have to have an honest conversation about our limited resources and our limited capacity to provide unbounded medical care to every single person. I believe in a civilized society that some basic level of health care services is appropriate. But right now we have not bounded that conversation.
In a book called An American Sickness, the physician journalist Elizabeth Rosenthal describes the industrialization of U.S. health care. It is a fascinating story with many twists between the rise of employer based insurance and the passage of Medicare and Medicaid.
In the 1960s, health care was increasingly paid for by a third party, someone other than the patient. This lack of transparency led hospitals to start charging more. But those increases didn't last forever. Insurers and employers, with the encouragement of the federal government, tried to bring down those rising hospital costs until around the mid 1980s, hospitals were fairly free to set the prices. They charged Medicare, but Medicare eventually established its own price list. A hip replacement would be reimbursed at X dollars, a coronary artery bypass surgery at Y dollars.
This led hospitals to adjust in at least two ways. The first was to push higher costs when feasible onto uninsured patients or patients with slim coverage.
Hospitals also started hiring MBAs and consultants to treat their business more like a business. This brings us to where we are today, with 38 percent of Americans covered by Medicare or Medicaid and over 50 percent who get insurance through their employer. The current trend is for a lot of these employers to drive down insurance costs by doing the job themselves.
A lot of businesses today are saying, why do we have insurance?
That, again, is Marty Makary. Apple has over a hundred billion dollars in cash reserves. That was true when we interviewed MacQuarrie. Apple now has nearly 200 billion dollars in cash.
Why do they need a company to protect them from high priced bills? So what you're seeing now is a trend towards self insuring.
And what you're seeing is that employers like HP are already fixing health care on a small scale.
HCB is a Texas supermarket chain.
I believe that we're the largest private employer in the state of Texas. That's Martin Otto, the company's CEO. And, yes, HCB self-insured its employees.
So by being self-insured, we basically put together through what's called a third party administrator for a network of physicians and hospitals to whom our partners can go for service partners is what she calls its employees relative to what most plans offer.
Ours covers a higher percentage of cost than most of them do and the type of health care services that are provided, it's very complete. So it's all of your health care needs then? Dental needs, eye care needs. If somebody has mental health requirements, those are covered.
It may strike you as unfortunate or at least inefficient that a company that sells groceries has to simultaneously mastered the art of health care coverage.
But according to Marty McCarry, for a company like HDB, it's worth it.
They take care of their own employees in their own clinics and they have their own pharmacy plan because they have their own pharmacies. So they've successfully managed the care of their own individuals.
More companies are starting to self insure, especially larger firms, and there are strong incentives to eliminate the insurance middleman, financial incentives for one, but also the desire to keep employees happy and productive. Be with its user friendly health care coverage is perennially ranked as one of the best places to work in the U.S.. In any case, health care insurance, no matter how a given person gets it, is the entry point for just about everyone in the U.S. health care system.
Since insurance is the model we have settled on to pay for health care, we were in a world of insurance, Larry Van Horn.
Again, we've devolved to a world of prepaid medical care, much of which we don't value. And prices, given the lack of economic tension of having the individual in play, have really come off the rails.
What does Van Horn mean by the individual not being in play? Well, consider how health care procedures and prices typically work.
I go to see my primary care doc and I have a cough and he says, you know, Larry, I think you should go downstairs and have a chest x ray and I go down and have a chest x ray. Takes me three minutes. All's well and good. And Bill three point ninety seven dollars and that of contractual allowance comes out to one hundred ninety seven dollars. And I have one hundred and ninety seven dollar bill in my hand.
Then I have to pay when across the street it's fifty four dollars cash transaction. That's a problem.
When there are no prices and people are charged after the fact through an intermediary like an employer or their insurance, that we see a tremendous amount of price gouging. That's Marty Makary. And most hospitals try to do the right thing. But there are instances when Americans are routinely gouged without even knowing it.
Imagine eating a hamburger at a restaurant with no prices and then afterwards they give you a bill and the bills for five thousand dollars. After you've digested the hamburger, you'd say that is a system that preys on people who come in hungry in health care. We are supposed to be an institution to serve the sick and injured. We're supposed to be there for people at a time when they're most vulnerable. And what concerns me about the price gouging and predatory billing in medicine today is that it is eroding the great public trust in the medical profession.
Having health care insurance doesn't necessarily protect you from exorbitant billing. The Yale economist Zack Cooper studies what is called surprise billing.
So this is the idea of the fully insured person does all the right stuff in an emergency, goes to need network hospital, but unfortunately sees a physician who isn't in his or her network and then gets a bill later for hundreds or thousands of dollars. These sorts of things financially break people. And a lot of us look on that sea of dysfunction and say we're sick and we're inefficient. We don't offer better care. And there's not altogether low probability that touching the system in the right way will bankrupt you.
Like, that's just absurd. And seemingly we should be able to do better. Coming up after the break, that Cooper and others have some ideas for how to do better, although not everyone is a fan, there aren't a lot of people in the US health care industry that are particularly excited about this. That's coming up right after this. This episode of Freakonomics Radio has brought to you by Lenovo, Steven Miller is a technologist at Lenovo and a full fledged self-proclaimed PC geek, but the title of technologist doesn't fully encompass all that he does.
He is a brand ambassador, a consultant for customers and business partners, and an all around explainer of things. His job is to not only tell the world about Lenovo and its products, but to listen to customers and business partners about what they need from their devices and turn their feedback into real, tangible solutions. In today's interview, you will hear Stephen's take on how generation disrupted has become the most powerful influencers in business and redefined technology as we know it.
I'm Steven Miller at Lenovo.
Everyone gets to make up my title. I've been running with technologists for a while. I function as a brand ambassador for Lenovo, so I know a little bit about everything that we do. And I work as a consultant for our customers and partners on what is the right solution moving forward and understanding the technology space. How do I get into PCs? I've had a computer every day of my life since 1976, so I had an Atari. Then the very first week that an Apple two E came out in the 70s, I had one.
So I've not been without a PC in my life since the Apple two E in 1978. I think I view it personally as this is not the life that you expected. And what we have on the other side of that is actually better, faster, stronger. But still, you could not have projected this would be the way that your career started. And we have a view that your technology is much like your personal style. So the technology to carry the brand, you carry its appearance, its texture, its material that has an effect on your wardrobe.
And that's really came from a younger generation. That was not my generation started that feeling. We started realizing it when there was a demand for something besides a traditional black think pat, and it came over from the consumer side. So we're like, well, let's test market, let's try an aluminum chassy PC. And it went crazy. So right now we've added to that. We have a leather folding PC, we have a titanium PC, we have carbon fiber, we have C and see the aluminum because it's not just the appearance or the color of those materials, but the textural feel of those materials.
And it came over from that consumer market years ago. What happens with this work from any work we found ourselves in? You find a disconnect and you have to work. Sure. That technology empowers you to stay connected and part of a team, the PC, can't be the weak link. So you've got to have Dolby Atmos speakers. You've got to have performance from Intel because sometimes these see tools are powerful. But then it's the right off the set up, the right keyboard and mouse to where people feel like they're in a professional environment, even if it's the kitchen counter and they have to take it out in the day.
We had a conversation that you're in New York, but you could have decided to be working for Bermuda today or Barbados. It doesn't matter if the Internet is good enough, you can work from there. And so with that, that means employers can hire from anywhere. So therefore, employers have to see that they have to have premium devices available. That's back to the design. How good is multiple microphones so that you get noise cancelation, it's better speakers, it's a better screen, more screen resolution.
So what would typically be a normal evolution of technology really got accelerated. We are always customer centric and end user centric, so every employee functions as a brand ambassador. So feedback is quite honest. We want to know how are you affected by your device? North America, we have about five thousand employees. There's five thousand employees that can give you feedback on the function of the device and making improvements for the next generation and stereotypically there, like the five thousand employees of any company.
So why not take that direct feedback as one of your sources to help your products have that wow impact?
The way we interact with technology has changed for the better, and we've entered a new world where tech exists to empower employees first to learn more about the ways Lenovo is improving the employee experience, visit Lenovo Dotcom Enterprise Hyphen Solutions.
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It's wonderful to feel that connection. The whole area came to life.
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You've got four episodes a week each under 15 minutes. A new wonder every day. The Atlas Obscura podcast is out. Now listen in. Stitcher, Apple, the Sirius XM app, or wherever you get your podcasts, it sounds nearly not human in a way.
One reason it's so hard to reduce health care costs is that prices are often hidden, many prices are negotiated in secret between insurers and providers. It can therefore be a guessing game as to what the patient will be liable for.
There was a researcher who called one hundred and one hospitals that do heart surgery in the United States and asked what's the price of a standard Kabbage or coronary artery bypass surgery?
That, again, is the Johns Hopkins surgeon and researcher Marty MacQuarrie, the author of The Price We Pay.
Only fifty three could give him an answer. About half of those hospitals that gave him an answer. The price of the cabbage operation ranged from forty four thousand to half a million dollars, with almost everything in between for 50 years. We've been told by hospitals we can't give you a price. Now, no one suggesting that we surgeons give you a price when you're shot in the chest. But 60 percent of health care is shop able. It's predictable and we can do a lot better.
McHenry's 60 percent figure of Chapell procedures is higher than some other estimates. In any case, the opaque pricing he is talking about here may be changing sooner than you think. In June 2019, President Trump issued an executive order on price transparency in health care.
What we did with this executive order is essentially provided data necessary for third parties in Silicon Valley or other places to make it more manageable for consumers to get price information before they actually undertake services, presumably non-emergency services.
That's Thomas Philipson, who at the time we interviewed him was acting chair of Trump's Council of Economic Advisors. This executive order had two directives.
One is to require hospitals to disclose standard charges for all services and to provide negotiated charges or cash prizes in a consumer friendly format for about three hundred, quote unquote, shopper services.
And the second one, the second one is for insurers.
And they have to essentially provide or disclose some kind of estimates of cost sharing for all covered services, essentially allowing the consumers to shop around more across providers.
So here's what the president said in announcing it. Hospitals will be required to publish prices that reflect what people pay for services. You will get great pricing. Prices will come down by numbers that you wouldn't believe. The cost of health care will go way, way down. So he's a politician. He can make those kind of broad claims. You are an economist. What's the evidence for that kind of claim? In other words, do you feel there's empirical history and evidence that prices will come down?
Or is this more of a theoretical argument?
Clearly, this will increase the price sensitivity of the customers if patients have better price information. And that's probably why both hospitals and insurers are against it. The paper I know that started this literature is my predecessor, Austan Goolsbee, who in the early 2000s showed that life insurance prices went way down. Once there was a posting on the Internet of their prices and in health care price transparency led to about twenty seven percent reduction in lab tech spending and 13 percent reduction in imaging.
Well, of course, not everybody would use pricing information, but proxy shoppers would.
Marty Makary, again, that is the employer plans, health plans and those fraction of people who are paying out of pocket who act as proxy shoppers for the rest of us. When I go to the grocery store, to be honest with you, Stephen, I don't look at prices. God's been good to me. I need to get in and out of there fast. But my mom does. She's looking at the price of a lemon at one store versus another and shopping based on price down to the penny.
Her and her friends may represent 10 to 20 percent of shoppers at the grocery stores in my neighborhood, but they keep prices in check for all of us.
The health care economist Zach Cooper is not as optimistic about the curative powers of price transparency.
I initially had thought the price transparency was a huge deal. That's where an economist initially goes to. It just isn't like the reason we spend a lot is not because our prices aren't transparent. I think our prices should be transparent. But doing it isn't going to reduce health care spending.
He came to this conclusion as a result of his own research.
So we looked at how individuals consume lower limb MRI scans that are planned. Well, it turns out that even when the prices are available, nobody uses the price transparency tool, even when they face tons of out-of-pocket costs.
And how does that make sense? Especially to you thinking it through as an economist, so it turns out the reason they don't use it and the reason they drive past six lower priced providers between their home and where they get care is because they listen to their doctors. So when we looked at what explained the price of people's MRI scans, it was all explained by the referring physician.
A couple of things to say about this.
One, patients aren't used to finding health care prices, so it may take a while to learn about this option and to get acclimated. Also, as with any economic activity, there are behavioral elements to consider. Two habits, for instance, are hard to break. Also, we trust certain people, our own doctors, presumably more than we trust others. And finally, the path of least resistance is an appealing path.
All that said, Trump's executive order on price transparency certainly got the attention of the health care industry, there aren't a lot of people in the US health care industry, provider payer organizations that are particularly excited about this.
That, again, is Larry VanHorn, the health care economist from Vanderbilt. He played at least a small role in the price transparency initiative. His passion for the topic was mentioned to President Trump by a mutual acquaintance, the economist Art Laffer, and that resulted in the president reaching out and having me come up and spend a little time chatting with him about it.
I basically made a point that we have, you know, 18 percent of the U.S. economy where Americans are making purchase decisions every day without any idea what the prices. And that's fundamentally kind of un-American.
As Van Horn said, most of the health care industry was opposed to the executive order on price transparency. I asked him for what reasons exactly?
Well, let's go through him.
Number one, these are confidential business contracts, B2B contracts that exist in many sectors of the U.S. economy, B2B meaning business to business, that is, hospitals are directly negotiating these prices with insurers, not with patients.
And you're setting a dangerous precedent by taking the gag orders off of confidential B2B contracts.
My reply to that one is yes, but no, these aren't B2B contracts, because when my payer negotiates with my provider and they legally enjoin me to pay money according to the contract that I have no visibility into, it's an entirely different world and it's an even different world when the payer is the government, as in the case of Medicare, correct?
Sure. So that's one thing. The second point they make, they've argued, is there will be tacit collusion and prices will go up. Well, if you honestly believe that, why are you fighting so hard to keep this? Is it really that you're such a great agent for the public interest? I don't believe that the market dynamics would support such conduct. I believe that markets are much broader, even an oligopoly. Markets where you say there would be coordinated pricing.
The reality is that would be highly visible to everybody, including the FTC and DOJ. So I don't think that argument holds water either.
Not long after Trump signed the executive order on price transparency, a lawsuit was filed against it by the American Hospital Association, the National Association of Children's Hospitals and several other hospital groups.
They argued that the Price Transparency Directive violated, among other things, their First Amendment rights.
The defendant in this lawsuit was not President Trump, but this man.
I'm Alex Azar and I was the 24th secretary of Health and Human Services, serving from January 2008 through January of twenty twenty one.
Great. And what are you doing now? I am sleeping. Azar was named as a defendant because his department, HHS, is responsible for executing the executive order on price transparency, as well as other executive orders that Trump issued on health care reform, calling for lower drug prices and better access to telehealth services. Beyond these executive orders, the Trump administration pushed a variety of health care reform legislation.
Those are very durable, legislatively authorized rules. So not by just a signing of the pen by the president, but these are actually very bipartisan things.
Here is how Azar characterizes the Trump doctrine on health care.
We were able to actually, I think, restructure health care and build it all completely around the patient at the center. So, you know, for too long now, the patient has really been acted upon. The patient is been just subjected to procedures because we pay for procedures and the patient hasn't been empowered to actually be part of a system that leads to higher quality and lower cost. We had so many distortions really dating back to the sixties and we tried to fix those distortions.
For instance, rather than continue to focus on paying for procedures, we started paying for outcomes. So this is what we call the total cost of care initiative, where we will pay providers a total amount of money for a year and they can work with you to improve your health, to keep you out of the hospital, keep you out of a nursing home. And that could mean they might buy you air conditioning at home or send in meals at home or do home visits the social determinants of health we talk about to keep you healthy and out of those institutions.
And if they reduce cost, they'll get one hundred percent of that savings. And if you cost them more money, then they'll eat 100 percent of that cost. And so these kinds of initiatives are, I think, going to be viewed a decade from now as having fundamentally changed. How health care is delivered in the United States in a way that puts the patient at the center, not our institutions and not our insurance companies.
We're now realizing that we have been doing too much as physicians. That, again, is the Johns Hopkins surgeon, Marty MacQuarrie.
And many times it was with good intentions. Sometimes it was driven by the perverse financial incentives. But we're now seeing a movement of doctors asking, hey, can we treat gut problems with healthy foods? Can we start treating joint problems with yoga or treat diabetes with cooking classes? Maybe the first line treatment for hypertension should be meditation or changing your social environment. And maybe loneliness is one of the greatest public health epidemics that stresses the body's physiology.
These are the root issues that we need to be talking about. And the new movement to address root causes and lifestyle reasons for bad health is alive and well today.
But the US health care set up as of now still makes it much easier to get paid for treating illness then preventing it.
You also have to wonder when an industry makes up 17 or 18 percent of GDP, trillions of dollars and millions of jobs, how likely are we to get the kind of reform that Marty McCarry and Alex Azar and others have been talking about today?
One encouraging sign is that the lawsuit filed by hospital groups against the price transparency order was rejected by an appeals court. As of January 1st, hospitals were required to publish their prices. A stipulation requiring insurance companies to publish their rates goes into effect next January. Drug discount prices are also included in that 20 22 rule. But how much will hospital price transparency really matter? One potential problem, the fine for not posting prices is 300 dollars a day or around one hundred and ten thousand dollars a year, is that a big enough incentive for a multibillion dollar hospital chain?
It brings to mind a study we described in our first Freakonomics book about a bunch of daycare centers in Haifa, Israel.
Some parents were routinely late and picking up their kids, so the management decided to invoke a fine three dollars per incident per child. The fine would be added to the family's monthly bill, which is just under four hundred dollars.
So what happened after the fine was enacted? The number of late pickups doubled. Why? Because a fine is also just a price. And if the price is low enough, it's worth paying. Larry Levitt, a health policy executive with the Kaiser Family Foundation, wonders if the hospital fine may teach us all the same lesson.
While the Trump administration's new price transparency requirement is quite sweeping, he tweeted, The enforcement of it is weak, a maximum fine of three hundred dollars per day. The technical term for that is chump change. I wonder how many hospitals will just pay the fine. A recent Wall Street Journal investigation found another way for hospitals to get around the price transparency regulation without even paying the fine.
Hundreds of hospitals have embedded code in their websites that prevented Google and other search engines from displaying pages with the price lists, the journal reporters wrote.
The price information is technically on the hospital's website, as one information science professor told the Journal.
But good luck finding it. It's one thing not to optimize your site for search ability, he added. It's another to tag it so it can't be searched. It's too early to say how the Biden administration will further Trump's health care reform initiatives or perhaps come at different angles. What is clear is that the Democrats also believe there is a massive amount of bloat in our medical system with too much money paid out to too many arms of the health care hijrah.
How much bloat?
Here's what the health care economist David Cutler, a veteran of the Obama administration, told us not long ago.
We have a three and a half trillion dollar medical system. And our best guess is that a trillion dollars a year is unnecessary.
One feature of health care reform, as with most reforms, is that the reformers like to take big swings.
A big swing would be something like Medicare for all or get rid of private insurance.
And some combination like that, or at least a medium swing. A medium swing is patch up the ACA and focus on costs.
But what about instead a series of little swings? That is what Zack Cooper, the health care economist at Yale, that's what he's been thinking about.
Yeah. So the broad idea was, you know, he's getting close to tenure and could think a little more about doing things that made the world better. And I gave a lecture actually to really big insurance company about the need to do randomized trials. And this company was spending a couple billion a year on lower limb MRI scans. And it turns out if you could get patients to just go to the place closest to their house, they would have saved a billion, which for them was about one percent of spending.
And I got off the stage and senior executive came up and said, hey, this is great, but we don't want research that tells us how to save one percent. We want you to do the research, tells us how to save 15 percent.
What did Cooper tell him? There isn't stuff that saves 15 percent. It's a series of half percent or one percent steps.
Cooper realized that pretty much everyone who thinks about cutting health care costs has the same idea as this insurance executive, that unless you can save 15 or 20 or 25 percent, a change isn't worth making. But what if Cooper thought what if he could come up with a whole bunch of one percent changes instead? He was so excited by this notion that he reached out to some other health care economists. He told them he was looking for legitimate, viable, evidence based policy ideas that could trim at least a little bit from the health care hydra.
And thus was born the one percent steps for health care reform project.
It's a compilation of three to five page briefs from folks who I think are the smartest health economists in the country, where each brief is saying, look, based on the research that they've done, what are discrete, tangible steps that we could take, that each would reduce health spending by, you know, half a percent. And then cumulatively adding those 10 to 15 proposals up can reduce health care spending in the US by hundreds of billions of dollars without the type of huge interventions that we often see in the presidential debates.
So what are some of these one percent proposals? Cooper's own idea is about hospitals that don't have many or even any other hospitals nearby.
I think of the town where my father lives, which is Bennington, Vermont, and there's a single hospital there that doesn't face any competition. And it turns out that about 20 percent of hospitals in the US look a lot like that.
Cooper and some other economists analyzed hospitals around the country and they found two key facts.
The first is that when hospitals are monopolies, they have higher prices and prices that are really quite a bit higher, 10 to 15 percent. And second, the quality that's worse. The hospitals are the largest area of health care spending in the US and these 20 percent of 15 to 20 percent premium on them. How do we set prices in regions where there isn't competition in most markets?
An economist would expect that competitors would rush in when there's profit to be made, but it is a lot harder and more expensive to open a second hospital than it is to open a second gas station or pizza place, especially in a small city or rural area.
I just don't think there's a real way to introduce meaningful competition.
So what's Cooper's solution? It sort of makes the economist hairs in the back of my neck stand up. Come on, it's OK.
You can say it like I don't like price regulation reflexively, but I think that's where we are. Price regulation. That's almost never the answer an economist gives.
Well, so I think it's I think it's we're in a position where we need to introduce price regulation in these markets because these markets, frankly, are natural monopolies. The way you can think about the health care system and hospitals operating a monopoly markets is at worst, they're giant sucking machine that's sucking money out of very, very hard working folks who are doing their best to pay very, very high insurance premiums. And seeing that transfer to the health care system, which is primarily staffed by some of the wealthiest people in the country.
So, yeah, I'm definitely not getting a Christmas card from Monopoly CEOs, but I don't think we have a choice.
OK, so that's one proposal from the one percent project, another based on research by Jason Abela and Jon Gruber is about how people choose a health insurance plan.
We can't reasonably hope that folks can choose between 100 different plans. And actually, if we constrain the choices people have, they make better choices.
Again, this notion constraining choices is not what economists usually preach. Their rule of thumb is that more choice is better, but about luck.
And Gruber found that many of the extra insurance options were low quality.
And actually, if we maybe have a default option that looks at you and says, huh, based on who you are and what you spent over the last couple of years, we're going to default you into the best plan for you that that actually will increase competition and create stronger incentives for insurers to to lower prices.
The insurance industry is cast as the villain and the profit maker in a lot of this. And it's obvious to me at least that there's some good cause for that. Are they as intentionally untransparent as many people assume them to be?
So I don't think there's any with a monopoly on virtue or a monopoly of. Flies in the system. There are two things to think about when we think about insurance companies. The first is higher health care costs really are paid by us. So you get your bill from your insurance company and it seems really, really high. That's because the underlying cost of health care in the US is high. Now, there's some profit margin mixed in there, but most of it is the hospital and the doctor and devices.
The second thing is, because of the Affordable Care Act, we put in what are called medical loss ratios, which say that a certain percentage, thereabouts of 80 percent of one insurer takes in and has to go out the door to cover health care costs. In a sense, profit caps. And we've said to a firm, look, you can only make 20 percent of the profits. The way to make more profits in absolute dollars is to grow the pie.
And so it's sort of a perfect storm of circumstances to generate a system that raises costs and lower it.
Now, one of your one percent colleagues, John Gruber, was involved in the creation of that scheme. Do you think that was an oversight?
If you look at the history of the policymaking process around the Affordable Care Act, it was the economists who were pretty against the medical loss ratio elements. There was a big push, I think, from the political folks to say, look, we can't require everybody to have insurance and not somehow constrain profits. And so I think that's like the ugly space where policy meets politics in the US.
Here's another one percent solution that Cooper's colleagues have been working on.
So it turns out that about 15 percent of the Medicare budget is spent on post acute care, which is care that's provided basically after you've been in a hospital post.
Acute care can happen in a variety of places in the patient's home with a home health visitor in a skilled nursing facility or in what is called a long term care hospital.
And long term care hospitals are interesting. They're not really distinct from skilled nursing facilities. They're sort of an administrative construct which grew out of the way. The Medicare fee for service program was built in the early 80s. They started this small group of hospitals that were meant to be rehab facilities, but they were paid way more than any other post acute provider. And what you saw happen is something that you see across the health care system, which is that a group of folks, often private equity firms, realized that this particular group of providers in this case, Long-Term Care hospitals, get paid way more than anybody else for the same thing.
And then they start investing in them and they start popping up across the country. Wow. And needing more customers.
Yeah, exactly. And they become really hard to get rid of.
The economists, Amy Finkelstein, Liron, Einav and Neil Mahoney did an analysis of these long term care hospitals, and they tried to see what ways they are.
They are they offering better care? Because while we pay them about 30000 more per case than we do anybody else, and the answer turns out to be no. I think it's a really good example of sheer waste. There's just nothing in that sector that provides good rent seeking and it raises spending by about four billion a year.
So it sounds like much of what you're describing up and down the line is what you economists call rent seeking re extracting profits without adding value.
But there are constituencies attached, right? Those rent seekers are people and firms and shareholders and so on.
Let's imagine that all of your one percent solution proposals were ultimately adopted, at least to some degree. Who are the constituencies that lose out the most and how much do they lose?
When we think about waste in the US health care system, we need to think that that waste is somebody's income and it makes it really, really hard to tap out. And what that's led me to do my own work is, I think, a lot about the political economy of the US health care system. It turns out members of Congress literally get more money when health spending goes up in their district. And when they do things that steer benefits to health care providers in the form of higher payments, they get a huge amount of additional money in campaign contributions.
And so we actually have a system that rewards politicians for taking steps that raise spending with such a complicated system. You can see why so much previous health care reform has attacked very large targets. The problem, as Zack Cooper points out, is that those large targets have large constituencies attached with all sorts of entrenched interests and a lot of resources to fight. That's why he is betting on the one percent solution. And it's a bet that is starting to pay off at least a little bit.
In December of twenty twenty, President Trump signed into law as part of the kofta relief funds in a package that had two provisions religious surprise billing, surprise hospital billing, you may recall, is another of Cooper's research areas. His paper on the topic was published in the prestigious Journal of Political Economy. One part of the law was what's called a hold harmless provision, which basically says, look, if you're a patient who sees an out of network provider that you can't avoid, you can't be billed directly by that provider.
You're only going to face the usual cost sharing that you get under normal circumstances. And second, it established a process through which physicians and insurers could settle disputes if there was a payment dispute. So this was sort of the textbook example for us of what could be done. It was a cool thing to do a paper that went from like the Journal of Political Economy, hashing out an idea, standing up in Congress. Awesome. Congratulations.
Thanks. And I think it actually will make a difference. It'll take time to see how much difference that legislation makes and to see how many other one percent solutions get adopted, but next time on the show, we look into one segment of the health care industry that accounts for way more than one percent of spending, six to seven percent of Medicare's overall budget, and it's almost one percent of the entire federal budget.
I don't know what the legal definition of fraud, but I think you're going to see some of those firms get pretty close to the limit, the very strange economics of kidney care and the dialysis industry.
That's next week. Until then, take care of yourself and if you can, someone else to.
Freakonomics Radio is produced by Stitcher and Redbud Radio. We can be reached at radio at Freakonomics Dotcom. This episode was produced by Zach Lapinsky. Our staff also includes Alison Crichlow, Mark McCluskey, Greg Rippin, Mary Duke and Emma Tyrrell. We had help this week from Jasmine Clinger. Our theme song is Mr. Fortune by The Hitchhiker's.
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