America’s Health Care System- Profits Drive Cost

                        Robert A. Levine    1-16-13

With Congress stalemated over raising the debt ceiling and controlling spending, health care costs could be reduced significantly to lower Medicare expenditures. However, this would require reducing profits in the equation and for Congress to battle the stakeholders (insurance companies, physicians, hospitals, pharmaceutical companies, and so forth). Unfortunately, conservative ideologues refuse to admit that the market does not work where health care is concerned and see more competition as the way to cut costs despite data to the contrary.

Hundreds of private insurance companies compete for business from corporations and consumers, but premium prices escalate yearly never-the-less. Recently, a number of insurance companies raised premiums for small businesses and individuals over 20 percent. This was done in spite of the growth of health care costs in the single digits over the last several years and a predicted increase of 7.5 percent this year. If they can charge more to increase their profits they will do it.

When consumers choose a physician, it is on the basis of convenience or a physician’s competence, not the low price provider. Patients do not want the cheapest neurosurgeon doing their brain surgery or the cheapest oncologist treating their cancer. On the other hand, physicians perform unnecessary tests and procedures to increase their income under a fee-for-service system of payment, incentivized to do so by the market. There are estimates from the Congressional Budget Office that about 30 percent of health care costs are the result of unnecessary care, $900 billion out of last year’s total of $2.7 trillion.

Pharmaceutical companies have been raising their prices on brand name and generic drugs to maximize their profits because they are able to do so. The costs of some cancer drugs are over $100,000 annually, but even long-standing familiar medications that treat diabetes, hypertension, and coronary artery disease have jumped in price with no apparent justification. But because Medicare is not allowed to negotiate prices with pharmaceutical companies, American citizens pay 20 to 40 percent more for their medications than their European counterparts.

Over the last few years, hospitals have increased their purchases of private medical practices since Medicare and insurance companies pay more for tests and procedures when done in a hospital facility. This is an easy way for hospitals to generate income. Electronic health records have also helped hospitals and physicians enhance reimbursement from Medicare and insurance companies for various procedures, by upcoding and raising the complexity of what was actually done.

The health care system needs to be changed and made less market friendly, not allowing the profit motive to drive costs upward. If the majority of physicians were on salary, as more than 30 percent already are, they would not have incentives to perform unnecessary tests and procedures. This is the way the Cleveland Clinic and Kaiser-Permanente operate, providing excellent care and physician satisfaction. If unnecessary care could be cut by two thirds, $600 billion in savings annually would be accomplished. (Though I am not necessarily advocating this, if the 600,000 practicing physicians were paid $300,000 yearly, it would cost $180 billion, leaving $420 billion to reduce the national debt, pay for defense, research, education, infrastructure, and so forth.)

Insurance companies also have to be regulated and made more efficient. One way would be for the government to allow only a limited number of plans as is now done for supplementary Medicare insurance. If that were instituted, businesses and consumers could more easily analyze the different companies on the basis of their charges for the same plans and true competition would ensue on price differentials.

Likewise, hospital charges for outpatient tests and procedures have to be reduced, with the same compensation that is paid in private physicians’ offices.  And Medicare has to be given the power to negotiate prices with the pharmaceutical companies, so that Americans don’t have to pay more than Europeans for the same medications.

If these steps were taken by Congress, which would mean taking on the stakeholders and their lobbyists, Medicare costs could be lowered along with health care costs in general. This would provide a major boost to the economy and would be an important victory in the battle to reduce the national debt.

Resurrecting Democracy

www.robertlevinebooks.com

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