Savings from a Trillion in Health Costs

Some of the government decisions that push Americans toward the brink of sanity are in healthcare policies that can and should be reversed.  With forethought and some political courage, better health policies can be adopted that allow consumers to make better arrangements and save substantially.  The following opportunities call for smarter government policies – they do not require cutting services.  Savings that could flow from improved patient behaviors will be handled in future blog.

One shameful government healthcare policy was the deal in which the White House and big pharma agreed to limit price cuts to $80 billion in return for Pharma’s support in passage of the Affordable care Act (ACA).  Our government agreed not to negotiate prices (i.e., pay more of taxpayers money than necessary) in return for Pharma’s political support. If an unelected person offered payment to an official in return for supporting a bill, most would call it corruption.

Details of the Faustian deal were never fully exposed but today, public disgust has forced the White House to strike a mildly annoyed pose at specialty drug prices such as $84,000 for a course of Sovaldi. In 2013, less than 1% of prescriptions were for specialty drugs, and they accounted for more than a quarter of spending.  But stratospheric-priced specialty drugs are snowballing and, by 2019, specialty prescriptions such as Sovaldi will be 50% of drug spending.

We find that in 2013, total US prescription costs increased by 3.9%. In 2014, Americans paid 10.9% more than in 2013 for prescription drugs, and in 2015 a typical family of four will pay 11.9% more for drugs than in 2014. In the latest 3 years, recurring prescription drugs costs have increased by $77 billion.

Pharma does not impose these high prices everywhere. Its price levels in offshore countries such as India are half or less of US prices. Clearly, with White House acquiescence, pharma chose to stick it to American consumers. Negotiations should apply to all government programs – Medicaid & CHIP (70.5 million beneficiaries), Medicare (49.4 million), VA (21 million) and ACA (10 million). There could easily be $806 billion per year in the pot for price haggling ($3,913 times 151 million beneficiaries).

No one favors runaway healthcare administrative costs.  For Medicaid, that purportedly runs about 2%.  For private insurance arrangements allowed under ACA, the tab is $1,375 per person, or about one-fifth of the per capita annual health expenditures. There must be a way to rein in administrative costs without degenerating into the autocracy of single-payer. Assuming a base of about 150 million in private insurance (ACA and employer-paid coverage), this administrative burden is $206 billion per year.

For hospital services, indigent patients face the most favored hospital pricing of all – gratis.  Over the years, government health plans such as for Medicaid & CHIP, Medicare and VA have aggressively negotiated prices with hospitals, and they pay a very small portion of the “rack rate” or full price. Insurance companies also negotiate prices and they win a discount inferior to the government’s discount, but far better than for those who are not insured at all.

This is “cost-shifting” on a grand scale. Costs are not decreased, just moved between invoices of the several customer classes. If private and government insurance schemes were made to pay the same price for the same service, at least government drain on resources would be portrayed more transparently and fairly, not conveniently hidden and subsidized by other hospital users.

The medical system endures a $200 billion annual cost for tort litigation and defensive medicine (i.e., excessive caution and medical testing brought on real fears of ruinous litigation).  Currently 54% of the cost goes to the trial bar and the court system, not to patients – so spare us the sanctimonious claims that the malpractice bar is devoted to protecting patients.  Actual malpractice damages are less than $92 billion.  When asked, five Americans out of six say Congress should fix the malpractice system.  When Congress is asked the same question, it replies with that it fears the trial lawyers.  The tort debacle is not just a waste of the public’s money, it causes physicians in high risk fields (e.g. obstetrics) to exit the field due to litigation risks.

In recent ACA estimates, premium subsidies and related spending is estimated at a ten-year total of $681 billion.  That puts massive upward pressure on the federal deficit and will be a chronic burden on taxpayers.  The top domestic priority for government is to stop using new entitlements to buy votes.  The second priority is to reduce healthcare costs, but not by telling patients what procedures they can and cannot have.

Instead, government should start with easy, non-medical issues. Negotiating over an estimated $806 billion in government-paid prescription costs could produce big savings. Haggling over $206 billion in administrative costs for ACA and private insurance would be productive too. Developing a political spine and reining in tort litigation could save about half of the $200 billion thrown to the tort bar each year. Stopping its cost-shifting in hospitals may save millions from hospital cost-induced bankruptcy.

Public savings could be huge from smarter negotiations on almost a half-trillion dollars in the above opportunities. There is no need to cut medical services – just spend less on non-medical aspects. Supervision of these negotiations is work worthy of Congress.

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