Thursday, August 26, 2021

Why U.S. Healthcare Prices Are All Over the Map with Armstrong and Getty

I visited with Jack and Joe this morning to discuss the latest NYT article on how the Trump Administration's transparency regulations are starting to shed some light on the absolute absurdity of American healthcare pricing.  We originally discussed these regulations in 2019 here and here.  As the NYT notes, this is a very rare bipartisan effort for regulators and legislators - at least on the surface.  But we have a long way to go to make these rules more effective.  

Our discussion was cut off before I could answer that last question. The answer is yes. We are still on a path toward some sort of socialized medicine by the end of the 2020s. We cannot sustain this present system much longer. 

Here are my show notes
  • U.S. Debt is not solely $28.7T. Debt plus unfunded liability is $155T which is $465,000 per citizen (not family).
  • Yet Medicare, the US’s largest single government-funded program only increases its payment by less than 1% per year.
  • This leaves large medical systems highly pressured to increase what they negotiate as reimbursement from BUCA (Blues, UHC, Cigna & Aetna – Big 4).
  • In 2010 Obamacare added a price control to healthcare mandating that insurers like the Big 4 may not keep more than 15% as profit and overhead. I.e., Insurers must prove that they are spending 85% of every dollar we give them on claims as opposed to overhead and profit.
    • This is called the “MLR” Mandate (Medical Loss Ratio).
    • The impact of this was to relax insurers’ incentive to keep claim costs down. Why? Because the only way for an insurer to increase revenue is to glow the claims pie. 15% of a $4,000 MRI pays better than 15% of a $1,000 MRI.
    • So now when giant hospital systems want to inflate prices for any given set of procedures, insurers have a reduced incentive to naturally fight against that inclination because of the bureaucracy.

"Since many of the administrative costs in health insurance are hard to cut out—costs like fraud prevention—insurers will be forced to resort to another option to meet Obamacare’s MLR mandates: premium hikes.

Think of it this way: let’s say you’re charging $10,000 for a health plan, and have $7,000 of health costs associated with that plan (and $3,000 of administrative costs), for an MLR of 70 percent. If you want to increase your MLR to 80%, there are two ways to do it. First, you can cut administrative costs and premiums (if administrative costs were $1,750, and premiums $8,750, $7,000 of health costs would equal an 80% MLR). Second, you can keep your administrative costs the same ($3,000 per person), and find ways to spend more money on health-care, passing on the costs in the form of premium hikes ($15,000 in premiums, and $12,000 in health expenses, would also yield an MLR of 80%).

To put this another way: if an insurer is forced to choose between cutting administrative costs by 42 percent, or not firing its employees and instead hiking premiums by 50 percent, which is it going to choose? After all the fat is trimmed, the insurer is going to choose to increase premiums, and increase them significantly. It will spend money on wasteful health expenditures, the kind that liberal health wonks are always complaining about, just to meet an arbitrary MLR target."
  • In addition to this, the excessive regulation and government involvement have made it increasingly difficult to have smaller, nimble, price-competitive medical systems and insurers.
    • This leaves us with four large national insurers.
    • And about 16 enormous hospital chains. We’ve moved from a “free market” to a highly bureaucratized oligopoly.
    • Doctors are not the problem. Individual practitioners are being overrun by this government-healthcare industrial complex nearly as quickly as patients are. Our largest challenges in this area are:
      • The government;
      • Insurers;
      • The pharmaceutical industry; and
      • Large hospital chains and medical groups

What can we do
  • Encourage your congressman to: 
  • Employers must look to use smaller, local insurers.  Employers with more than 300 to 500 employees should look to self-fund their health plans and remove insurers from the equation entirely.  Reference base price your plan if you can.