America’s Healthcare System – Part 10
Our Unwieldy, Costly and Senseless Healthcare Financing System
This is the tenth essay in Civic Way’s series on the US healthcare sector. In this essay, we describe one of healthcare’s major flaws—its financing (insurance) system. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving public agencies.
Highlights:
Our health insurance system is the primary means for financing healthcare in America
The Affordable Care Act (ACA) made incremental health insurance improvements, but it did not fundamentally change the dynamics of the healthcare industry
The array of health insurance offerings is confounding, inefficient and an important driver of our exorbitant healthcare costs and disappointing health outcomes
The undeniable shift of insurer costs to patients is making healthcare even less affordable, creating a massive medical debt crisis, and expanding the ranks of the underinsured
By emphasizing treatment over prevention, the system helps ensure mediocre results and high costs
Introduction
Every year, the US healthcare costs are twice that of other developed nations. Given how much we spend, our health outcomes should be considerably better than other nations. Unfortunately, our outcomes are worse, and the gap between the US and our peers is worsening by the year.
There are many reasons for this. Too little prevention (and public health capacity). Uneven care access and quality. Fragmented healthcare resources (see last essay). An ill-conceived healthcare financing (insurance) system. Antiquated administrative systems and insufficient innovation.
In this essay, we focus on the fourth of these causal factors—an unwieldy healthcare financing system. In an earlier essay, we provided a sketch of the US health insurance system (see health insurance profile). In future essays, we will describe the last major causal factor, and some short- and long-term ideas for fixing those flaws.
How Health Insurance Fails Us
Our nation’s health insurance system is the primary means for financing the delivery of healthcare. Because it was developed sporadically—rather than designed strategically—its many flaws should not surprise.
It’s convoluted structure makes it inefficient and costly. Its reliance on the fee-for-service reimbursement model fosters provider-induced demand. Its best insurance plans shield patients from costs and make them indifferent consumers. Its worst plans make quality care elusive if not unaffordable. Despite its costs, America’s health insurance system offers less coverage than those of other wealthy nations.
The system’s flaws are easier to diagnose than fix. Despite heavy private sector involvement, insurance costs continue to rise. Even with the ascent of large corporate healthcare chains, patients and taxpayers can be left behind. The Affordable Care Act (ACA) notwithstanding, the system remains resistant to public intervention.
The Affordable Care Act—Reform or Relief?
The ACA, boosted by federal pandemic relief legislation, improved our health insurance system in several ways. It reduced our uninsured rate from 15 percent in 2013 to less than nine percent in 2020. It clamped down on junk insurance plans and preexisting condition exclusions. It secured free or discounted care for indigent patients. And it benefitted those states expanding Medicaid (i.e., the expansion states).
Still, ACA was not reform. After narrowly surviving many attempts to kill it, the ACA brought incremental change. It did not attain universal coverage or fundamentally alter health insurance dynamics. Its federal marketplace covers only three percent of the population, and has not stimulated the competition that is needed. Its dependence on marketing makes it vulnerable to enrollment period and outreach budget cuts.
Worse, due to the vagaries of federalism, 12 states[i] chose not to expand Medicaid under the ACA. In those states, many low-income individuals aren’t eligible for subsidized health insurance coverage that otherwise would be. Because Medicaid is state-run, many states deny coverage with onerous eligibility limits and some fail to adopt income thresholds for mandating free or discounted indigent care.
The Extremely Fragmented Health Insurance System
The US has one of the world’s most complex health insurance systems. All developed nations—except the US—give their citizens universal health coverage. Some use a single-payer model (e.g., UK), some a multi-payer model (e.g., Canada) and others a private model (e.g., Netherlands). In contrast, the US employs a non-universal model, with an ever-changing mix of private and public plans—a costly, but leaky umbrella for its citizens.
The US health insurance market is a virtual labyrinth. A breathtaking—and bewildering—array of programs. Public programs like Medicare, Medicaid and CHIPS. Some run by the federal government, some by states, some by both. Some serving different groups, Medicare for the elderly (mostly), and Medicaid for the poor and disabled. And scores of publicly subsidized plans.
Private insurers dominate the US health insurance market. Private employer-based insurance plans still cover most Americans. Private insurers also sell plans through the ACA marketplace and Medicare Advantage (MA) program. The US has over 900 health insurance firms, each with numerous plan offerings. And each plan comes with different criteria, coverages, reimbursement rules[ii] and cost sharing arrangements.
Americans must navigate an intimidating assortment of health insurance plans—like Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), Exclusive Provider Organization (EPO), Point of Service (POS), Health Savings Account (HSA)-qualified and Indemnity plans. The federal marketplace offers a different classification scheme for its health insurance plan offerings—Bronze, Silver, Gold and Platinum. Why does it have to be so damn complicated?
The High-Cost US Health Insurance System
America’s per capita private health insurance costs are among the world’s highest, and they’re getting higher. From 2010 to 2020, average employer-based health insurance costs for a family rose over 60 percent and those for an individual rose nearly 40 percent.
The Medicare Advantage (MA) program, which accounts for over half of all Medicare enrollees, illustrates how our insurance system inflates costs. Launched nearly 20 years ago[iii], MA was intended to give Medicare enrollees more access to services not fully covered under Medicare A and B (e.g., preventive, hearing, vision, and dental services). The government pays participating private insurers a flat monthly amount per enrollee and allows them to keep any excess payments for lowering premiums, expanding benefits or boosting profits.
Despite the fact that MA enrollees are generally younger and healthier than other Medicare enrollees, MA costs the government about three percent more per person than traditional Medicare. There are several causes for MA’s rising costs, including a flawed bidding mechanism, poorly controlled bonuses and aggressive upcoding. Intentionally or not, most leading MA insurers have overcharged the government. As MA enrollment continues to increase, MA could further weaken Medicare’s fiscal footing.
Shifting Costs—and Debt—to Patients
Like the US, the health insurance systems of other developed nations require enrollees to share healthcare costs. What makes the US system unique—or notorious—is the extent of costs borne by patients. The plans with the lowest premiums, which typically carry the highest deductibles, can have deductibles of $10,000 per year per family. Patient cost sharing for employer-based health insurance plans also is on the rise.
Thanks in part to the 2003 Medicare Modernization Act, High-Deductible Health Plans (HDHPs) have blossomed, and out-of-pocket costs—deductibles, copayments and premiums—have sharply increased for most insured patients[iv]. The ACA established benefit standards for insurance plans but did little to control copayments and deductibles. The average 2022 deductible for an individual plan was about $1,760, over two times the 2006 amount (adjusted for inflation)[v].
The health insurance system creates nearly $200 billion in medical debt for Americans. One in five households have medical debt, of which over 25 percent carry at least $5,000[vi]. At any one time, nearly 60 percent of the debt held by collection agencies is medical—the very debt those agencies find the hardest to collect. When they pursue medical debt litigation and post-judgment collection, they rarely collect the full balance, but they do make life a whole lot harder for the debtors.
The growing medical debt crisis impacts some more than others. Most medical debt is for unavoidable care like emergency room visits and vital surgeries. Medical debt is heavily concentrated in non-expansion states[vii].It disproportionately falls on the uninsured, poor and chronically ill. Counties with most multiple chronic conditions also tend to have the most medical debt[viii].
The Health Insurance System Breeds Uncertainty
Finding and keeping good health insurance is not easy in the US. And that, in and of itself, is a drag on our productivity and economy. The fear of losing insurance handcuffs us to jobs for which we may not be well-suited. That fear impedes entrepreneurialism and may dampen the American spirit of which we are so proud.
Employer-based insurance, the dominant form of health insurance, may be the biggest offender. In 2021, over 160 million adults had job-related health insurance. Those employed without health insurance may buy ACA marketplace plans or short-term, high-deductible plans with poor coverage. Those losing jobs with health benefits may retain their insurance at higher rates under COBRA. Regardless, employer-based insurance increases costs, jeopardizes access and deepens inequalities.
Government health insurance plans are not as stable as we may think. Medicare’s trust fund could be insolvent by 2030. It’s structure, with multiple parts, insurers, coverages and reimbursement rules, is confusing. Medicaid varies widely by state. In many states, its ever-changing eligibility criteria and benefits, let alone its fragile relationship with providers, render it less reliable than it should be.
The Plight of the Underinsured and Uninsured
For years, we have been fixated on the uninsured. The ACA was a noble effort to improve the US healthcare system, but its primary focus was on helping the uninsured. However, as patients bear a greater share of healthcare costs, affordable care can be similarly elusive for the underinsured. Any effort to reform healthcare must address the uninsured and underinsured.
The US health insurance market leaves far too many Americans uninsured or underinsured. In 2020, at least 43 percent of US adults aged 19 to 64 were considered inadequately insured[ix]. Nearly ten percent of Americans—some 28 to 30 million—were uninsured in 2021,[x] with the highest rates in the non-expansion states. About 25 percent of the uninsured are eligible for Medicaid and one-third for federal tax subsidies.
There are far more underinsured Americans than uninsured, and their numbers have been growing. It has been estimated that, in 2022, over 40 percent of those with individual health plans, including ACA marketplace plans, were deemed underinsured. Many with employer-based plans, especially high-deductible plans, also were underinsured. For the underinsured, out-of-pocket costs make healthcare increasingly unaffordable.
How Health Insurance Distorts Healthcare
America’s healthcare insurance system finances healthcare, but it also distorts its delivery. Some of those systemic distortions are noted below.
The fee-for-service reimbursement method incentivizes treatment over prevention, procedures over outcomes and occasionally unnecessary, costly care.
Many insurance plans encourage providers to generate demand that will benefit those providers financially even if the services offer marginal value to the patients.
The Medicare reimbursement review mechanism follows suit, often giving preferential treatment to specialty procedures at the expense of primary care, counselling and chronic disease management[xi].
For the well-insured, the system creates the illusion that they are insulated from their bills, thereby making them less informed—and discerning—consumers.
For the uninsured or underinsured, the high costs of premiums, deductibles and copayments make healthcare unaffordable, a service—no matter how vital—to be delayed if not neglected.
The current health insurance system is an inefficient, myopic patchwork of plans. With its short-term focus on compensating procedures, it inadvertently inflates healthcare costs, limits access to affordable care, separates patients from vital healthcare decisions and fails to improve health outcomes.
Closing
Most of us know that there is something terribly wrong with our healthcare insurance system. We understand that our healthcare costs are too high, and sense that our health insurance system somehow contributes to those staggering costs.
What we probably don’t grasp quite as well is the negative impact of our health insurance system on our health. How funding treatment over prevention hurts our health outcomes. How deferring or forgoing care because of its cost hurts all of us, including those with higher incomes.
So, we resign ourselves to what we have, perhaps because it is so hard to change.