Complications: Is complexity to blame for America's expensive healthcare?
The spring and summer of 2017 have seen the debate surrounding healthcare in America reach a fever pitch. It’s no secret that the U.S. spends more on healthcare than any other developed country; in 2016 healthcare spending made up 17.2% of GDP, an amount equivalent to $3.2 trillion. (In comparison, the UK spent 9.7% of GDP.) Both the Affordable Care Act and this year’s Republican attempt to “repeal and replace” it, the ill-fated American Health Care Act, have received extensive press coverage. Yet even so, polls show that Americans still have little understanding of not only health policy, but health insurance in general. A recent study, published in the Journal of Health Economics, revealed that only 14% could correctly define the four insurance terms that would determine how much care would cost them. And what they don't know can hurt them; part of the explanation for the high cost of healthcare in America comes down to its confounding complexity.
Where do Americans get health insurance?
Much like the NHS, the American healthcare system as it currently stands can be traced back to World War II. In 1943, President Roosevelt signed an executive order freezing wages, prompting companies to turn to benefits (including health insurance) to attract workers. Fast forward, and most Americans (47%) receive insurance from their employer as part of their benefits package. Employers choose one or more insurance companies, then offer a selection of their plans to employees. Inevitably though, not every American is able to receive quality health insurance from their employer, and the government must step in to fill the gaps. About 40% of Americans receive insurance from Medicare or Medicaid, government insurance programs assisting Americans over 65 (Medicare) and those in low income brackets (Medicaid). Government employees are also insured by the government, as well as those eligible to join the Veteran’s Affairs health system. A minority of insured Americans buy individual plans directly from insurance companies, and about 9% of Americans are uninsured.
Complexity is costly
Despite clauses in the 2010 Patient Protection and Affordable Care Act requiring more transparency from insurance companies in detailing coverage, Americans are still frustrated by a system they don’t understand. The American health insurance system depends on a competitive market to reduce prices and improve quality of care. Healthy competition requires consumers to make informed decisions; in this case, choosing the plan that will get them the most coverage for the lowest cost. Yet when only 11% of study participants can correctly calculate the cost of a four-day hospital stay given a simplified insurance plan, this is easier said than done. Economic research has also shown that when faced with too many choices, consumers become overwhelmed and actually harm competition by making less optimal decisions. This is particularly true for those buying from the individual insurance market, where plans are not pre-screened and selected by an employer. This is a classic conundrum of the American insurance system; faced with an abundance of choice, consumers are too overwhelmed and too confused to make the economically optimal decision.
The complexity of the health insurance system also contributes to cost in other ways. According to the OECD, administration alone accounts for 8% of health care expenditures in the U.S., compared to a developed country average of 3%. Each insurance plan comes with its own network of providers (hospitals, doctors, clinics, etc.), list of covered services, and methods of cost-sharing for patients. When each doctor and hospital has to communicate with dozens of insurance companies and hundreds or thousands of patients, it makes for a lot of paperwork. Furthermore, it is not uncommon for patients to receive lofty bills they weren't expecting, for services they thought would be covered by their insurance. The current system is set up to place the onus on the patient, and in the midst of an emergency checking if the nearest hospital or the doctor providing treatment is in-network is often the last thing on the mind.
The sheer number of insurance companies operating in the U.S. also mean that each company has less bargaining power. In the UK, the NHS has significant bargaining power to negotiate lower prices from providers and drug companies. This is partly because it is a subset of the government, and partly because without an NHS contract, providers and pharmaceutical companies would have difficulty finding patients to sell to. The U.S. government has some bargaining power; according to the Congressional Budget Office, Veteran’s Affairs and Department of Defense policy holders get prescriptions that are roughly half of retail price. Yet for most Americans, the plethora of private insurers means that if one insurer insists prices are too high, the provider can likely find a competitor willing to foot the bill. This is part of the reason prescriptions in particular cost more in the US than in other countries, even after insurers have negotiated down the price.
What can be done?
While support for a single-payer system has been incrementally growing as of late, there are several more politically viable and less dramatic proposals that would help simplify the current system and decrease costs. One solution, already floated by the state of Nevada, would be allowing anyone to opt-in to Medicaid coverage. The government program is currently capped by income, leaving most Americans ineligible, but under the proposal those with incomes above the cutoff would be able to pay a small premium to access coverage. While the bill was vetoed in June by the governor of Nevada, Senator Brian Schatz of Hawaii plans to propose a similar bill in the Senate.
Alternatively, health economist George Loewenstein of Carnegie Mellon University, a co-researcher on the Journal study, proposes eliminating all forms of cost-sharing except co-payments to simplify the system. Loewenstein admits this could produce sticker-shock for consumers, as their co-payments would be significantly higher, but insists “…in a traditional plan you’re paying the same prices. You just aren’t as clear about it.”
If there’s anything this summer’s debate on the American Health Care Act proved, it’s that Americans agree the system needs reform. Simplifying the system would be a step in the right direction. The question remains whether policy makers are up for the challenge.
From October 2017
