Beneath the Surface

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By now, just about everyone knows two things about the Affordable Care Act: The website that is supposed to sign people up isn’t working, and President Obama broke his promise that people could keep their existing health insurance if they wanted to. So far in the rollout of the new law, the program seems to be failing, both in political support and in actual success in getting people insured.

Medical metaphors seem irresistible. Obamacare is badly wounded, in critical condition, on life support–take your choice. Some commentators are talking as if it were already dead. Of course, many on the right already pronounced it a failure before the health exchanges even opened. Now they are joined by mainstream media who may not be rooting so hard for it to fail, but do tend to overreact to the latest events and miss the bigger picture.

My contrarian prediction is that the Affordable Care Act will turn out to be very hard to kill. The federal website will keep getting better, although that will take longer than the remainder of this month. More importantly, the benefits of the new law will become increasingly apparent in the states that are fully implementing it by setting up their own exchanges and expanding Medicaid. The success of the Massachusetts experiment, which was based on the same (conservative) principles as the ACA, is likely to be emulated in other states, and that will make it very hard to roll back the entire program.

Consider the basic logic of the ACA. The goal is to increase health insurance coverage both qualitatively and quantitatively–better coverage for more people–while keeping coverage affordable. Private insurers have to improve coverage by accepting people with preexisting conditions at no extra charge, observing federal caps on out-of-pocket costs, and providing a standard range of benefits. The mandates requiring individuals to carry insurance and large employers to offer it are supposed to generate enough premium payments from healthy people to cover improved benefits for the sick without raising premiums too high. The government helps by expanding Medicaid coverage to those with incomes between 100% and 133% of the poverty level, and by providing subsidies for those with incomes up to 400% of the poverty level.

Any assessment of the law must consider how it affects three groups of people:

• the adequately insured, who already had good coverage through Medicare, Medicaid, employer group plans or relatively expensive individual plans
• the minimally insured, who could only afford to buy plans with very few benefits
• the uninsured, who lacked insurance either because they couldn’t afford it or believed they didn’t need it

The law was meant to have little impact on the adequately insured and the greatest effect on the uninsured. President Obama was probably thinking primarily of the first group when he said that people who liked their plan could keep it. That statement turned out to be more misleading and controversial for the second group, the minimally insured. They could be affected in various ways by the new higher standards of coverage:

• A grandfather clause allowed holders of substandard policies to keep them, but only if they were issued before 2010 when the law was passed
• People could drop substandard policies and shop for better policies in the exchanges, taking advantage of any federal subsidy that applied
• People could receive a cancellation notice, often with an option for an upgraded policy at a higher rate

It was the very last group for which the President’s promise didn’t hold. Some people liked their minimal plans because they were cheap, and they didn’t mind or didn’t realize their limitations. They thought they could keep them and were upset when they received letters saying they couldn’t. The insurance companies helped mislead their customers by issuing new policies after 2010 without telling them that the policies wouldn’t qualify for grandfathering. Nor did they explain in the cancellation letters the possibilities for greater choices, better prices or subsidies in the exchanges.

As Jonathan Cohn has pointed out,  the debate over keeping existing coverage is primarily a battle for the right to keep the least popular form of insurance, and the one that has been associated with the worst company abuses, such as finding excuses to cancel policies if people actually get sick.

To sum up, lots of people losing coverage are losing policies they never liked much, that they would have dropped soon anyway, and that would have left them facing potential financial ruin if they got sick. Even those with truly good policies had no guarantees that in one year, let alone two or three, they’d still be able to pay for them.

President Obama has announced a temporary extension allowing insurers to continue substandard policies for one more year, but that may be hard for insurance companies and state insurance commissioners to implement on such short notice. Eight states have already announced that they will not allow it.

One other aspect of this debate deserves special mention. Many people are upset that they might have to pay higher premiums for coverage they don’t need, such as maternity benefits in policies purchased by men. This gets to the heart of what you think insurance is about. Is it like a retail store where you buy only what benefits you personally? Or is it a social system for making casualties more affordable by spreading the risks and costs among the many? Some of the same people who don’t want to pay for public goods through government want to extend their libertarian philosophy even further and avoid insuring people whose medical needs are different from theirs. True, men don’t get pregnant, but they do the impregnating and share the benefits of family life, not to mention the general social benefits of raising the next generation. What a hypocritical society we are if we celebrate motherhood while refusing the share the costs of maternal care!

Of the three groups–adequately insured, minimally insured, uninsured–the minimally insured are the smallest, consisting of no more than 5% of the population. Of those, the ones who are truly better off keeping their existing policies than shopping in the exchanges are a minority of a minority. Yet they have received far more media attention than the 50 million uninsured who stand to gain from Obamacare. The refusal of the Republican-run states to extend Medicaid hurts far more people, but it doesn’t provide the “gotcha” feature of catching the President in a lie.

The recent debates over the website and the President’s promise by no means seal the fate of the Affordable Care Act, although they do raise some red flags. The success of the program depends on getting a lot of the uninsured and the minimally insured to sign up, especially those healthy and wealthy enough to pay at least as much in premiums as they take out in benefits. The program could fail if too many of them fail to enroll because the website is dysfunctional, or because they are permitted to keep a cut-rate policy that doesn’t meet the new standards. Even if they cannot repeal the legislation, the opponents of the bill can help it fail by fighting for the “right” to be uninsured or minimally insured, strange as that may seem to true health insurance reformers. Some groups are running ads trying to persuade the uninsured not to sign up, although the law is primarily for their benefit.

However, the opponents are going to have a hard time getting the ACA to fail in all of the states. About half the states are participating in the Medicaid expansion, and fourteen states have set up their own insurance exchanges and websites, the best of which are in New York, California, Connecticut and Kentucky.  The states that are rejecting Obama’s proposal to allow insurers to extend substandard policies for another year are not primarily Republican states, but Democratic states that are trying very hard to implement the new law in its totality.

What I expect to happen is that resistance to the law continues in Congress and in many of the states while implementation proceeds in others. That could be a good thing, because it will give the country a chance to conduct an experiment and compare the outcomes. The large number of people who get adequate and affordable insurance for the first time should outweigh the number who had to give up a cheap policy they liked. Even if the opponents were to repeal the federal law, more states would probably proceed with their own reform, as Massachusetts already did. The idea of improving coverage through a combination of government incentives and private insurance will probably be with us for some time. No alternative is in sight, besides going back to the national scandal of massive coverage gaps or forward to a more radical “Medicaid for all” approach.

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Some of the most important provisions of the Patient Protection and Affordable Care Act (also known as “ACA” or “Obamacare”) will take effect within the next few months. On October 1, the new state insurance marketplaces (also known as “exchanges”) will open to help the uninsured find a health insurance plan and–if they qualify–receive a federal subsidy. This year’s enrollment period extends from October 1 to March 31.

Most people who fail to obtain health insurance by March 31 will face a penalty on their federal taxes: $95 per adult or 1% of household income, whichever is greater. That penalty will rise to $695 per adult or 2.5% of household income by 2016. The Supreme Court ruled that this “individual mandate” is constitutional under the federal government’s taxing authority.

If you earn too little money to be required to file a tax return, you are not subject to this penalty. You are also exempt if buying the least expensive type of qualified plan (the “bronze” plan, as explained below) would cost you more than 8% of your income. But the latter exemption is not likely for very many people because of federal subsidies for people of modest means.

If you fail to obtain insurance by March 31, you’ll have to wait until next year’s enrollment period, unless you experience a life-changing event such as loss of a job or divorce. Although you can no longer be denied insurance because of a preexisting condition, you could find yourself unable to get it when you need it.

In this post, I’ll summarize how the Affordable Care Act applies to people with difference sources of health insurance: Medicare or Medicaid, coverage through employment, or policies obtained in the new health insurance marketplaces.

Medicare and Medicaid

If you are already insured through Medicare or Medicaid, your insurance will continue under Affordable Care. Medicare recipients will receive additional benefits, including free preventive care and expanded prescriptive drug coverage.

The ACA authorizes states to expand Medicaid coverage to include households with incomes up to 133% of the federal poverty level. That would include single adults with incomes up to $15,282, two-person families with incomes up to $20,628, three-person families with incomes up to $25,975, and four-person families with incomes up to $31,321. The federal government will pay 100% of the cost of this expansion in 2014; the federal contribution will drop to 95% in 2017 and to 90% in 2020.

Whether you can qualify for Medicaid under the expanded eligibility depends on where you live. Under the original ACA, a state that refused to expand Medicaid would lose Medicaid funding altogether, but the Supreme Court struck down that provision of the act, in effect making the expansion voluntary. Twenty-two states have decided not to participate or are leaning that way, most commonly southern states and other Republican-controlled states.

Coverage through employment

If you have health insurance through your employer, that coverage is likely to continue. And if you work for a business with over 50 workers, your employer will have to provide insurance or face a penalty. (This provision was supposed to go into effect in January of 2014 but has been delayed for one year.) Large employers will also be penalized if the coverage they provide isn’t both adequate and affordable. “Adequate” means that it must cover at least 60% of the average cost of health expenses in the area, according to a calculation that adjusts for the demographic characteristics of the local population. “Affordable” means that it doesn’t force employees to pay more than 9.5% of their household income in premiums.

Smaller employers are not required to provide insurance, but they are encouraged to do so with tax breaks and special state marketplaces where they can shop for affordable plans. The Maryland marketplace is called “SHOP” (the Small Business Health Options Program).

Even f you work for an employer that does offer health insurance, you can still choose to obtain a plan elsewhere, but you won’t get a federal subsidy if your employer’s plan is adequate and affordable as defined above.

If, on the other hand, you leave your job, voluntarily or involuntarily, the new law really helps. In the past, your options were very limited: you could continue your employer’s plan for 18 months under COBRA, but only if you could afford to pay both the employee and employer’s contribution. Or you could pay the full cost of individual insurance, or just go without. Now you have the option–but also the mandate–to obtain coverage through the new state marketplaces, with a good chance of getting a federal subsidy.

Health insurance marketplace

Most people (over 80%) will obtain health insurance either from their employer or through Medicare or Medicaid. But for those who are not covered that way, the new health insurance marketplaces, such as Maryland Health Connection at www.marylandhealthconnection.gov , will give them new options. States like Maryland are running their own exchanges, while others are letting the federal government run them wholly or partly. In either case, you should have the same kinds of choices and subsidies.

The insurance plans come from private insurers, but they must conform to certain standards. All must accept people with preexisting conditions at no extra charge, charge women and men the same rates, and observe federal caps on out-of-pocket costs. All must provide certain essential health benefits, such as hospitalization, doctor visits, emergency-room services, preventive tests, maternity and newborn care, mental health care and prescription drugs. Some of these are benefits that many of today’s plans lack.

The marketplaces will offer four levels of plans–platinum, gold, silver and bronze–depending on the extent to which they cover average health care costs in the area. Coverage ranges from 90% for platinum to 60% for bronze. The higher tiers will have higher premiums, but lower deductibles and co-payments.

You will be able to get a federal subsidy to offset at least part of your cost, as long as your income is under 400% of the federal poverty level. That would be $45,960 for a single person, $62,040 for a family of two, $78,120 for a family of three, and $94,200 for a family of four. The Kaiser Family Foundation provides a calculator for estimating your subsidy at www.kff.org/interactive/subsidy-calculator/ . The Foundation estimates that the average family with get a subsidy of $5,548.

For example, a single, 35-year-old adult with an annual income of only $20,000 should get a subsidy of about $2,667, which could be applied to any of the four levels of plans. After the subsidy, a silver plan would cost only $1,021 per year, and a bronze plan would cost only $390. A family with two 40-year-old adults and two children should get a subsidy of $8,182, reducing a silver plan to $3,365 and a bronze plan to $1,389.

When you purchase insurance in the marketplace, you provide an estimate of your income to calculate your subsidy, and then start paying the remaining premium for the plan you choose. Any adjustment is made when you file your tax return and report your actual income.

Young adults

Because most young adults have fairly low incomes, most will qualify for subsidized policies or expanded Medicaid if they don’t get insurance through their jobs. In addition, two provisions of the Affordable Care Act apply to them specifically.

One provision that is already in effect is that young people can continue to be covered through their parents’ health insurance plans up until their 26th birthday.

When the health insurance marketplaces open on October 1, adults under 30 can buy a catastrophic policy intended only for unusually high costs. It will have a lower premium than the usual tiers (platinum-to-bronze), but a higher deductible.

Affordable care?

The Affordable Care Act is a massive social experiment with uncertain outcomes. On the one hand, it is a big expansion of coverage to include more people, with more medical conditions, receiving a wider range of services. That’s potentially very costly. On the other hand, its individual mandate intends to increase the number of healthy people paying premiums without needing too many services. As Amanda Gengler put it in Money magazine (Oct. 2013), “The success of Obamacare hinges on a delicate balance: Insurers have to cover everyone, regardless of how ill they are, and everyone has to have coverage, even those who never need to see a doctor (a group that’s called the ‘young invincibles’).”

If too many of the young and healthy opt out, preferring penalties to premiums, policies for others could become unaffordable, even with the tax subsidies.

Some employers could also opt out rather than providing qualified coverage, especially for their retirees, and some workers may feel that the coverage available in the marketplace is not as good a deal as they used to have at work.

What’s supposed to happen is that the Affordable Care Act creates far more winners than losers. What will really happen remains to be seen.

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Chapter 6 of Donald Barr’s Introduction to U.S. Health Policy analyzes Medicare, the federal health insurance program for the elderly. The good news about Medicare is that it is “the most efficient medical payment system in the country,” costing much less in administrative costs and other non-care expenses than private insurance. The bad news is that Medicare has not succeeded in controlling the rising costs of care. The Medicare Trustees’ Report of 2009, before the passage of the Affordable Care Act, projected that the trust fund covering hospitalization would be exhausted by 2017.

Citizens 65 and over are eligible to enroll in Medicare. Medicare Part A is a service plan covering hospital care without charging a premium. After a deductible payment roughly equal to one day of hospitalization, Medicare pays the entire cost up to 60 days per illness, and part of the cost for up to an additional 90 days. Part A also covers the entire cost for up to 20 days in a skilled nursing facility following hospitalization, and part of the cost for up to an additional 80 days. It also covers the cost of hospice care for the terminally ill. Part A is financed by a 1.45% tax on employers and employees. In theory, the taxes paid by a large generation as workers can generate a trust fund surplus to help cover their benefits as retirees, but in practice, the rising cost of care has created an impending shortfall for the Baby Boom generation.

Medicare Part B is an optional, premium-based insurance plan covering physicians’ bills and other outpatient medical costs. Almost all seniors choose to participate in the plan, usually by having the premium deducted from their Social Security payment. The premiums cover only about one-fourth of the government’s cost, with the rest coming from general tax revenues.  Medical providers can decide whether they will “accept Medicare assignment,” meaning that they limit their fee to Medicare’s standard rate for the particular service provided. If so, Medicare will pay them 80% of that fee, and the patient will pay the remaining 20%. If they do not accept assignment, they can charge the patient up to 115% of Medicare’s standard rate, and the patient can obtain reimbursement from Medicare for 80% of the standard rate (which may be as little as 70% of the fees charged). About half of doctors prefer not to accept assignment, since the Medicare standard rates are generally less than what they would otherwise charge. This is one reason why the Medicare system has only limited control over the cost of care.

Since Medicare covers only 70-80% of outpatient costs, about 90% of recipients have some sort of “Medigap” policy, a supplemental policy to cover the remaining costs. They get that policy in a number of different ways: purchasing from a private insurance company, receiving coverage from a former employer as a retirement benefit, being eligible for Medicaid due to income below the federal poverty level, or participating in a Medicare managed care plan. In the 1970s, the government has encouraged the participation of Medicare recipients in Health Maintenance Organizations, on the assumption that HMOs would be good at keeping people healthy and reducing medical expenses. The Balanced Budget Act of 1997 expanded managed care options through the “Medicare + Choice” program, later renamed “Medicare Advantage.”

The financing of managed care through Medicare has proven to be tricky. On the one hand, the government wanted to support managed care organizations at a high enough level to make them attractive to providers and recipients alike, but on the other hand, it wanted to contain the overall cost of the Medicare system. Before 1997, Medicare paid HMOs 95% of the average cost of caring for fee-for-service Medicare patients. But this appeared to be too generous, since HMOs tended to serve the younger and healthier Medicare population. The Balanced Budget Act of 1997 required that Medicare develop a risk-adjusted payment model, taking into account the health status of the recipient. Payments per recipient to managed care organizations dropped, with the unexpected result that many HMOs stopped covering seniors. In 2003, the Bush administration got Congress to pass the Medicare Prescription Drug, Improvement, and Modernization Act. In addition to adding costly prescription drug coverage, the act greatly increased the funding for the managed care options, now called “Medicare Advantage.” It guaranteed these plans 100% of the average cost of covering traditional Medicare patients, plus annual increases in their payment rates. Over the next few years, participation in these plans doubled to 24% of all beneficiaries, and the average cost rose to 114% of traditional Medicare. What had originally been advocated as a way of reducing costs actually ended up increasing them.

The Balanced Budget Act of 1997 also tried to control costs by establishing a formula for a “sustainable growth rate” (SGR), above which Medicare payments to providers wouldn’t be allowed to rise. What has generally happened is that medical fees go up anyway; providers threaten to stop serving Medicare patients if the SGR is enforced; and Congress gives in and authorizes higher payments. Barr concludes, “The SGR was modeled largely on the historically successful efforts in Canada to constrain the costs of physicians’ services. The difference, of course, is the political will to permit the mechanism to work.”

The Patient Protection and Affordable Care Act of 2010 affects Medicare by adding some new benefits, imposing some additional taxes, and making some new efforts to control costs. Seniors can now receive mammograms, colorectal cancer screening, and annual preventive exams with no co-payments or deductibles. Medicare payroll taxes and Part B premiums will be higher for high-income seniors, and new taxes will apply to pharmaceutical companies, medical device companies and certain health insurance companies. The act establishes an Independent Payment Advisory Board with the responsibility to devise plans for keeping Medicare spending from exceeding targets. (Such plans cannot, however, include increases in Medicare taxes or premiums, or restrictions on benefits.) The Act reduces the payments to Medicare Advantage plans so that they do not exceed those of traditional Medicare.

The Medicare Trustees reached a somewhat ambiguous conclusion regarding the future of Medicare under ACA. Based on the provisions of the law, it projected that the Part A trust fund would remain viable until 2029, instead of 2017 as earlier estimated. However, they expressed some doubt about their own projections, suggesting that the cost reductions called for by the act might prove impossible to implement in practice.

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Donald Barr begins his discussion of health insurance by saying that health care doesn’t fit very well into the traditional model of how insurance is supposed to work:

Insurance is based on the concept of the random hazard: houses will burn down somewhat at random, people will get into car accidents somewhat at random. It is possible to separate people into risk categories, but within a risk category, hazards are assumed to occur somewhat randomly. One can predict the average rate at which hazards will occur within a certain risk group, estimate the aggregate cost of these hazards, add on a certain percentage for profit and administrative costs, and divide the total by the number of people to be insured. This gives the insurance premium to be charged.

A medical treatment is not a random event, but a human decision made by doctors and patients. The treatment that will occur within a particular doctor-patient relationship is very hard to predict. Also, the very fact that an insurer is paying the cost may lead the patient to seek or accept more treatment, with little regard for expense. Health insurance can actually add to the cost of the health care system, unless insurers can place limits on utilization. On the other hand, such limits have to be carefully designed to discourage unnecessary care without denying patients treatments they really need. The quality of care is a prime consideration, but judgments of quality reflect underlying values, such as the value Americans place on high-tech treatments. Barr says, “Unless the institutions and belief systems inherent in our society change regarding what constitutes high-quality care, any success managed care achieves in holding down the cost of care is at risk of being seen as a decrease in the quality of care.”

Three trends have transformed the role of private health insurance in the American health care system. The first is the expansion of health insurance coverage provided by employers since the 1940s. Wartime wage and price controls kept unions from bargaining for higher wages, but not from bargaining for health insurance. In 1954, the federal government exempted fringe benefits from taxation, making them more valuable to workers than equivalent wages.

The second trend is the managed care revolution encouraged by the Health Maintenance Organization Act of 1973. Based on the success of a few forerunners like Kaiser Permanente, this law subsidized the formation of HMOs and required employers offering health insurance to provide an HMO option. “Over a period of thirty years, the United States shifted from a health care system organized almost exclusively on a fee-for-service basis to one organized around HMOs and other forms of capitated, managed care delivery.” Capitation refers to a payment system in which doctors are paid according to the number of patients they contract with the HMO to serve, instead of according to the specific services they provide. The original HMO was a nonprofit entity, but soon insurance companies developed competing models, especially the “preferred provider organization” (PPO), which does pay providers for specific services, but at a discounted rate.

The third trend is the increasing role of for-profit insurers since the 1980s. With the encouragement of the free-market-oriented Reagan administration, Congress deregulated HMOs, eliminating the requirement that they operate on a nonprofit basis, and also ended federal funding for new HMOs. Those changes, along with the spread of alternative plans like PPOs, shifted health insurance to a primarily for-profit system. Insurers use the term “medical loss ratio” (MLR) to refer to the percentage of each premium dollar that actually goes toward medical care. (It’s a loss in the sense that the money is lost to profit.) Not surprisingly, the need to make a profit reduced that percentage:

Historically, the MLR of nonprofit HMOs such as Kaiser Permanente has been in the range of 95 percent. The MLR for the Medicaid program is also typically about 95 percent, and for Medicare about 98 percent. Nearly all of the money in these traditional programs goes to pay for care. In the world of for-profit managed care, MLRs typically range from 70 to 85 percent.

In general, less was spent on patients in managed care than on patients in traditional fee-for-service arrangements. As a result, the transition to managed care initially flattened the cost curve: health care costs as a percentage of GDP rose less than they had been rising before. However, once most of the patient population had made that transition, costs started rising again at about the previous rate. In the 1990s, managed care organizations initiated a number of utilization-control mechanisms, such as requiring doctors to obtain permission from a utilization review department before ordering an expensive test or hospitalization. Media accounts of denials of care seriously undermined support for managed care and generated a popular backlash. Many HMOs then relaxed their controls somewhat, and costs continued to rise.

In theory, the profit motive should encourage insurers to compete on price and quality, resulting in good coverage at an affordable price. In practice, many consumers find either that they have little choice among plans where they work or live, or that all the plans are too expensive for them. The people who can’t afford insurance are primarily young adults working in low-wage jobs, often working for small employers who don’t offer a company plan, or at least not one these employees can afford. They need private insurance because they aren’t old enough to qualify for Medicare or poor enough to qualify for Medicaid. Not only has the for-profit health insurance system failed to make insurance affordable for millions of Americans; it may also have had some negative effects on quality. Barr cites research using the Healthcare Effectiveness Data and Information Set. HEDIS doesn’t measure health outcomes such as death rates, but it does measure how well health plans follow recommended treatment guidelines.

In 1999, Himmelstein et al. published a major study that compared average HEDIS scores for 248 for-profit and 81 nonprofit HMOs. Combined, these 329 HMOs represented 56 percent of the total HMO enrollment in the country. Using data from 1996, they compared the plans on fourteen quality-of-care measures included in HEDIS. They found statistically significant differences in thirteen of the fourteen measures; in each case, for-profit HMOs scored lower than nonprofit HMOs.

The Patient Protection and Affordable Care Act of 2010 relies on a combination of public and private insurance to increase access to health care. It extends Medicaid coverage to those with incomes below 133% of the federal poverty level (FPL). (After Barr’s book went to press, the Supreme Court ruled that states are free not to participate in this Medicaid expansion.) Those with incomes above 133% of the FPL without coverage through their employment must obtain health insurance or pay a tax penalty (the “individual mandate”). Those with incomes between 133% and 400% of FPL will receive a tax credit to help them purchase private insurance. Employers with over 50 employees must provide health insurance or pay a penalty for each worker who obtains it elsewhere. To provide that “elsewhere,” the law requires each state to have a “health benefit exchange” (HBE) through which the uninsured can shop for coverage. Each exchange will offer at least two different insurance options, one of which must be offered by a nonprofit. The act also requires that for-profit insurers either spend at least 80% of premiums on health care (85% if they serve the large employer market), or rebate to their participants the shortfall in what they do spend.

Although the Affordable Care Act should reduce the cost of insurance for many consumers, it is not expected to reduce the total cost of health care to the country. In fact, the federal Center for Medicare and Medicaid Services projects that total costs will rise a little faster with the new law, since more people will have access to treatment. Again, that points to the challenges involved in increasing access, maintaining quality, and controlling costs all at once.

Continued

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A major theme running through Donald Barr’s Introduction to U.S. Health Policy is the challenge of developing a health care system with care that is accessible and affordable as well as of high quality. The United States has a long way to go in this respect, given that our system is the most costly in the world but less than optimal in accessibility or health outcomes. Barr’s discussion of doctors, hospitals and pharmaceutical companies provides many clues as to why this is the case. The role of health insurance–public and private–will be the topic of the following post.

Barr describes the professionalization of the medical profession in the twentieth century, a movement led by the American Medical Association. Medicine became more science-based; doctors had to be licensed; medical schools were certified and became centers for medical research. The number of people who could call themselves physicians went down, but their pay and prestige went up, especially for specialists.

Today the US has about one physician for every 400 people, but service is uneven in a number of ways. Specialists outnumber primary-care physicians by over two-to-one. Wealthy suburbs of metropolitan areas are better served than inner-city or rural populations. African Americans are underrepresented in the medical profession, making up 13% of the population but only 4-5% of the doctors. On the other hand, international medical graduates (IMGs) have become a substantial segment of the profession. US hospitals offer more residency training positions than US medical school graduates can fill, partly because Medicare reimburses hospitals for the costs of such programs. “Adding a residency program (or expanding an existing one) not only adds to the prestige of the hospital, but also provides a source of inexpensive labor. In many hospitals, especially inner-city hospitals providing care to large number of poor patients, residents provide the bulk of direct patient care….U.S. medical graduates tend not to choose many of the inner-city hospitals for their training, leaving numerous unfilled training slots at these hospitals. To have sufficient personnel to take care of patients, these hospitals turn to international graduates to fill the residency programs.” Ultimately, IMG’s are especially likely to become medical specialists themselves.

In a perfectly competitive free market, an oversupply of services in a specialty or a region could be expected to bring prices down. But because doctors have so much authority to prescribe treatment, more doctors usually means more procedures at the same high prices. “Instead of reducing the price of care, the rising number of specialist physicians has contributed to the increasing cost of care.”

The Affordable Care Act aims to expand the delivery of primary care in several ways: by directing more funding for graduate medical education toward programs for primary care training, rather than more specialized training; by increasing reimbursements for primary services; and by increasing support for a new way of organizing primary care, the patient-centered medical home. The PCMH is a “team of providers, including physicians, allied professionals such as nurse practitioners or physician’s assistants, as well as support personnel with a range of professional skills.”

American hospitals are generally more expensive than those in Europe or Canada. Up until the 1980s, hospitals had little incentive to limit the care they offered, since they often received public money to expand and full reimbursement for patient care. “The payment system encouraged the acquisition of new facilities and technology, even if they duplicated facilities and services readily available elsewhere in the country.” More recently, cost controls have been imposed, most notably the Medicare prospective payment system (PPS), which pays only a fixed amount per admission, based on the patient’s diagnosis-related group (DRG). That has resulted in shorter hospital stays and more outpatient procedures. However, if the hospital has to spread its fixed costs across a smaller number of occupants because a lot if its beds are empty, that is also an inefficiency that contributes to high systemic costs.

Although American hospitals have traditionally operated on a nonprofit basis–and most still do–the balance has been shifting as some older hospitals close and new for-profit ones appear. The research cited by Barr suggests that “rather than reducing hospital costs, for-profit hospitals increase costs compared to nonprofit hospitals, without corresponding increases in quality or improvements in outcome.” In many cases, physicians have become owners or managers of for-profit operations to which they refer their own patients, such as kidney dialysis centers. There the research shows that “compared to treatment in nonprofit kidney dialysis centers, the treatment of patients with kidney failure in for-profit centers is associated with higher death rates and lower rates of referral for kidney transplantation.” Because of the conflicts of interest involved, the Affordable Care Act prohibits any new physician-owned hospitals.

Prescription drugs are also more expensive in the United States than in many other countries. They amount to about 10% of all national health expenditures. The US grants manufacturers a twenty-year patent on new drugs, in order to provide an incentive to engage in the process of research and development. Why incur the costs of a medical breakthrough, so the argument goes, if someone else can come along and copy your discovery? Critics suggest, however, that a lot of drugs are getting more patent protection than they deserve. “Less than 10 percent of new drug applications approved by the U.S. Food and Drug Administration are for new compounds that represent a significant improvement in therapy. Most new drugs are chemical modifications of existing drugs.” Once one company has developed a profitable drug, another company produces one that’s just different enough to get its own patent. The new drug doesn’t compete so much on the basis of superior quality or lower price, but primarily on aggressive marketing to doctors (and increasingly, directly to patients, thanks to relaxed regulation by the FDA). Gifts such as “educational” travel to doctors have resulted in several highly critical reports, such as by the National Academy of Science and the Association of American Medical Colleges. US policies obviously help keep drug prices high, but they may not have the intended effect of fostering innovation. Barr cites research by Keyhani concluding that “the United States did not contribute disproportionately to innovation in the development of new types of drugs when compared to countries that had adopted price regulation for pharmaceuticals.” But the Kaiser Family Foundation found that for every year they studied, “pharmaceutical manufacturers enjoyed the highest profit margin of any industry in the United States.”

Continued