A country struggling to share too-high healthcare costs

Jonathan Cohn today posted a roundup of eight health care experts' prognoses for the Affordable Care Act. Among them is Sean Parnell, author of the book and blog The Self-Pay Patient, information sources for those forced to pay all or most or a good portion of their medical expenses out of pocket. Regardless of whether the ACA "succeeds" or "fails," this part of Parnell's forecast is a near-certainty and worth noting:

There will be more Americans who pay directly for more of their health care. The ACA is projected by the Congressional Budget Office to leave 30 million people uninsured, and tens of millions more will get high-deductible plans through exchanges or their employers. These self-pay patients will demand price transparency and discounts for paying in full at the time of treatment, and innovative entrepreneurs will step up to cater to them while ignoring the traditional third-party payment system.

Many have pointed out the irony of Republicans excoriating the ACA for offering high-deductible plans, which conservatives have long touted as a means to promote patient responsibility and cost control. Some reforms intended to make patients weigh costs could be effective if they include the information required to make an informed choice -- e.g., incentives to choose providers with high performance ratings and transparent pricing -- or reference pricing, where the use of a plan-preferred specialist is fully covered, while patients pay the difference if they want a more expensive provider. 

Could a "doc fix" have a bigger impact on U.S. healthcare than the ACA?

Two interrelated features of the U.S. healthcare system are probably the primary causes for the uniquely high cost of healthcare in the U.S.: weak government control over pricing, and the fee-for-service payment model.

These interrelated weaknesses are exacerbated, as a weekend Washington Post exposé showed, in that Medicare pretty much lets doctors determine the rates at which they paid, by leaving it to the AMA to produce estimates of how long each procedure takes. Surprise! The doctors' chief trade group massively pads the estimated times required for most procedures. 

Even if procedure prices were based on accurate time estimates, free-for-service incentivizes providers to perform a high volume of the most expensive procedures. Nonetheless, countries in which the government imposes monopsony price control -- i.e., every other wealthy country in the world -- generally manage to deliver universal healthcare at two thirds to half the cost per capita of healthcare in the U.S.  Government control over pricing, as Ezra Klein recently forced healthcare free market evangelist Avik Roy to admit, is the sine qua non of effective heathcare cost control.  And we in the U.S. don't have it, as a study published in Health Affairs ("It's the Prices, Stupid...", Gerard F. Anderson et al., 2003) explains:

A public option that isn't? What's the tradeoff?

(12/9 update at bottom)

The Times is reporting tonight that the "Gang of 10" Democratic senators designated to come up with a health care reform bill that can pass has agreed to put the public option on ice. It's not entirely clear what liberals got in return yet but here's the outline as picked up by Robert Pear and David Herszenhorn:

Oh for a health care monopsony

Those who blame for-profit health insurers for high U.S. health care costs usually focus on administrative and marketing costs. As Ezra Klein has highlighted, however, these are difficult to calculate; they're not always significantly higher in the private sector than in the public; and they don't fly as a primary cause of the U.S.'s uniquely high per capita health care spending.

Yet our Balkanized health care payment system does have a huge impact on health care costs. Klein again, citing Kaiser Permanente CEO George Halvorson pointing out that CT scans cost about 3x as much in the U.S. as in Europe, links to a 2003 study published in Health Affairs ("It's the Prices, Stupid...", Gerard F. Anderson et al. ) analyzing why procedures cost so much more in the U.S. than in OECD countries with universal healthcare.

The conclusion of this study bears out T.R. Reid's reporting in The Healing of America. Countries with universal health care all accord government the power of monopsony - "a state in which demand comes from one source." That is, the governments of France, Germany, Japan, Canada and England all set the prices for every procedure (or patient, in a capitated system) -- regardless of whether or not payments are funneled through private (nonprofit) insurers. All of them, by American standards, squeeze doctors and hospitals. Anderson et al:

In the U.S. health system...money flows from households to the providers of health care through a vast network of relatively unccordinated pipes and capillaries of various sizes. Although the huge federal Medicare program and the federal-state Medicaid programs do possess some monopsonistic purchasing power, and large private insurers may enjoy some degree of monopsony power as well in some localities, the highly framented buy side of the U.S. health system is relatively weak by international standards. It is one factor, among others, that could explain the relatively high prices paid for health care and for health professionals in the United States.

In comparison, the government-controlled health systems of Canada, Europe, and Japan allocate considerably more market power to the buy side...

Even a pure monopsonist is ultimately constrained by market forces on the supply side -- that is, by the reservation (minimally acceptable) prices of the providers of health care below which they will not supply their goods or services. But within that limit, monopsonistic buyers enjoy enough market clout to drive down the prices paid for health care and health care inputs fairly close to those reservation prices. It can explain, for example, why Fuchs and Hahn found that "U.S. fees for procedures are more than three times as high as Canadian fees [and] the difference in fees for evaluation and management services is about 80 percent."

From this perspective, individual health insurance companies are not "to blame" for high U.S. health care costs. But the system that allows them to exist is. When the government abjures monopsony power, patients lose.

Doctors do consider themselves underpaid and in some cases overmanaged in monopsony systems. On the other hand, they generally have to cope with zero medical school debt, piddling malpractice insurance fees, and minimal administrative burdens (in France, where national health cards record every procedure and fee, the time and money doctors spend on administration is close to zero). Ironically, one reason U.S. insurers pay doctors and hospitals so much more than their rich country peers is that the balkanized payment and claims system imposes onerous admnistrative costs on providers.