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The Cost Problem

Why Is Health Care So Expensive in the United States?

Fragmentation - Insurance is about pooling risk. The larger the pool of people, the better the insurer and the insured are protected against economic risk. We have a very fragmented health care system that finances and administers based on demographics and whims of fate. We have one program for the poor and disabled, one for the elderly, one for military families, one for veterans, one for Native Americans, a patchwork system of employer-based coverage for many working people, and no affordable option for far too many. Fragmentation leads to administrative waste, lack of continuity of care, gaps in coverage, cost shifting, increased potential for fraud, and inadequate sharing of information that could improve medical practice.

Administrative Complexity - It is estimated that administration accounts for somewhere between 25% and 31% of total U.S. health care spending. The multitude of insurance plans diverts dollars that could be spent on health care into administrative functions such as marketing, enrollment, underwriting, contract negotiation, utilization review and claims adjudication. Spending on health care administration in the United States is approximately three times that of Canada, and twice as much as a percent of total health care spending.

Prices - Health care goods and services cost significantly more in the United States than in other economically advanced countries. We spend more than twice as much on prescription drugs per person than the average OECD country. In addition, our pricing is opaque, complex and widely variable. A physician can be paid a different amount by each insurance plan for the same procedure. Prices are negotiated between payers and individual providers or provider groups, resulting in a range of payments reflecting buyer and seller market clout. Payers with less market clout may pay higher prices to make up for the underpayment of payers with more market clout. Most countries that have multiple insurers rely on the monopsony power of government to set or negotiate prices, so that they are uniform across regions and cost escalation is held in check.

Concentrated Pricing Power - In Minnesota, as in most states, there are highly consolidated insurance markets and provider systems, giving them oligopoly power (concentrated pricing power). Integrated delivery systems of hospitals, clinics, and physicians have the leverage to demand higher reimbursement rates from insurers lest the providers pull out of the insurance plans, harming the insurers’ ability to attract enrollees who value provider choice. Oligopolistic insurers have the power to charge premium prices higher than costs and pass the costs on to patients. To combat the oligopolistic power of insurers and providers, we need countervailing bargaining power on behalf of patients.

Physician Compensation - Physician services account for about 22% of total health care spending, both nationally and in Minnesota. U.S. health care professionals are generally paid higher than their counterparts around the world. High compensation is driven by the high cost of medical education and the high debt load of medical school graduates which incents physicians into higher paying specialties. The United States has a lower number of MDs per capita than most of our industrialized nation peers. This lower supply may play a role in driving up compensation. Minnesota has a relatively high rate of primary care providers which may help hold down prices somewhat, though they are not well distributed throughout the state.

Oversupply of High Tech Equipment - Often a result of competition between hospitals or delivery systems, a glut of high tech equipment and specialty centers helps drive utilization. When physicians have ownership of scanning equipment or surgical centers there is a financial incentive for overuse.

Skewed Incentives - Much attention has been given to the fee-for-service system and its inherent financial incentive for doctors to increase the volume of health care services. Though this incentive exists, the volume of visits in this country is actually lower than in other OECD countries. There is a multitude of skewed incentives in our system that both increase costs and lead to cost shifting: the financial incentive for individuals to decline coverage or delay care due to cost, leading to delayed diagnosis and subsequent increased complications; the incentive for insurance companies to focus plan development and marketing toward enrolling a relatively healthy population, thus increasing administrative expenses and shifting costs to sicker people and increasing their reliance on public plans; the drug patent system which incentives development of “me-too drugs,” increasing spending on pharmaceuticals with little or no health benefits; and our reimbursement system which incents providers to perform procedures over coordinating care or spending time with patients.
 

Health Care is a Drag on the Economy, Disproportionately on Small Business

Health care costs are one of the biggest barriers to job creation. The cost of health care is especially burdensome to small businesses which have a competitive disadvantage in health insurance markets. A survey of small business owners in 22 states found that an average of 86% of small business owners who don’t offer health coverage say they can’t afford to provide it, and an average of 72% of those who do offer it say they’re struggling to afford it. Linking health insurance to employment leads to job lock (the inability of an employee to freely leave a job because doing so will result in the loss of employee benefits), suppresses job creation and decreases our global competitiveness.


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