America’s Healthcare System – Part 11
US Healthcare’s Resistance to Efficiency and Innovation
This is the 11th essay in Civic Way’s series on the US healthcare sector. In this essay, we address healthcare’s uneven efficiency and innovation. 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.
US healthcare is inefficient due to many factors—inadequate public health and prevention, fragmented insurance, insufficient provider competition, archaic licensing rules, and a broken malpractice system.
Our health insurance model, by putting procedures ahead of outcomes, is one of the influential causes of rising healthcare costs.
Healthcare administration’s inefficiencies—like records management and billing—are well known, and its accountability is too scattered and diluted to be effective.
Until the US controls prescription drug prices, they will continue to make healthcare less affordable and health outcomes less competitive than they should be.
Innovations that would benefit most (if not all) consumers— like telemedicine—are too often resisted, discouraged or overlooked.
Every year, Americans pay twice as much for healthcare as citizens of other developed nations. Given how much we spend, it would be reasonable to expect far better health outcomes than other nations. Sadly, our outcomes are actually worse, and the gap between the US and our peers is worsening by the year.
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There are many reasons for this phenomenon. Too little prevention (and public health capacity). Uneven care access and quality. Fragmented healthcare resources. An ill-conceived healthcare financing (insurance) system. Administrative stagnation.
In this essay, we focus on the last of these causal factors—administrative stagnation. In future essays, we will outline some pragmatic short-term—and bold long-term—ideas for fixing those flaws.
Our Burdensome Healthcare System
The American healthcare system has become a colossal millstone—on society and on individuals.
Healthcare accounts for 20 percent of the US economy—it once accounted for only ten percent. Over the last 50 years, it has grown 1.5 times faster than GDP. Healthcare now costs eight times more than education, 30 times more than law enforcement, and nearly 90 times more than water management.
The average American spends over $11,000 per year and over $400,000 lifetime on healthcare. The average 65-year-old retiree couple spends $300,000 on healthcare, excluding long-term care. And, for a surprising number of Americans, health insurance offers little aid. According to the Commonwealth Fund, 43 percent of working-age adults are uninsured or underinsured[i].
Why are US healthcare costs so high, and outcomes so troubling? There are many reasons, too many to catalogue here. We have highlighted a handful of these factors below, but they are by no means the only ones.
Unconscionable Healthcare Delivery Costs
If one were to design a system that’s sole purpose was to make healthcare unaffordable, it would look a lot like the one we have. An anemic public health system. Insufficient preventive care. Fragmented insurance programs. Geographically scattered providers. Inadequate provider competition, especially in rural areas. Archaic licensing rules. Undue training mandates. A broken malpractice system.
Such pressures conspire to make healthcare inefficient and ineffective. Underfunded public health and prevention leave too many unhealthy or with multiple illnesses. Provider and insurer mergers and acquisitions reduce the competition that could help control costs. Lengthy and costly medical training programs—and the accompanying debt—push physicians toward more lucrative specialty practices. Fears of litigation encourage many providers to order unnecessary—and costly—treatments.
As noted in our last essay, the US health insurance model is a major driver of escalating healthcare costs. It encourages providers (particularly specialists) to put procedures ahead of outcomes. It links provider revenues to frequent, high-cost and occasionally unnecessary tests, treatments and interventions. An estimated ten percent of medical procedures are unnecessary and up to two million dubious operations take place every year. Unwarranted care increases costs by billions every year. Worse, it can put patients at risk.
Even when interventions are merited, the reimbursement model makes hospitals too dependent on elective procedures for revenues. Even when the model turns patients away, it can inflate overall provider and insurer costs. When private insurers reject claims, more patients use public insurance programs[ii]. When people in rural communities or marginalized urban neighborhoods use emergency rooms—because the insurance model failed them—it has the perverse effect of hurting provider revenues and costs at the same time.
Inefficient Healthcare Administration
US healthcare administrative costs are excessive using any metric. They account for an estimated 15 to 30 percent of US healthcare costs. On a per capita basis, they are at least $500 per person, and at least twice that of the next most costly nation. Three avatars of inefficiency are records, billing and accountability.
The industry has steadily digitized its records management systems, but its electronic health records (EHRs) resemble a patchwork of platforms. Until EHRs can be seamlessly shared among providers and platforms, vital data will continue to be lost, test results will be misplaced, and mistaken diagnoses will lead to the wrong medical interventions. And preventable costs and patient suffering will persist. Until public health agencies receive accurate provider data on a real-time basis, they cannot help citizens manage their own health, and they cannot fully protect the public from pandemics and other existential threats.
Healthcare billing has become impenetrable. For most of us, the cost of medical care is a mystery until long after we receive it, if not forever. Upfront estimates are rare. The billing code system can facilitate misdiagnoses[iii]. Initial bills are confusing. Insurance statements offer more frustration than clarity. Worse, surprise medical bills for out-of-network medical care—like surgeries and emergency room visits—can expose patients to crushing debt and life-shortening anxieties.
To the extent the healthcare system has any accountability, it is hopelessly diffused. At the federal level, there are the Centers for Medicare and Medicaid Services (CMS), Food and Drug Administration (FDA) and Veterans Administration (VA). There are 50 state Medicaid programs. There are hundreds of health insurers. There are a multitude of state medical boards, professional societies and hospital boards. Every year, there are nearly $2 billion in recovered funds. under the False Claims Act and about $4 billion in medical malpractice claim payouts. There is a lot of finger pointing but no single point of accountability. Diffused accountability is virtually none at all.
Scandalous Prescription Drug Costs
There is no better example of the healthcare system’s inefficiencies than prescription drugs. They cost more in the US than in any other country—often two to four times more than in peer countries. In the US, we spend a staggering amount on prescription drugs (over $500 billion in 2020 alone). According to the Kaiser Family Foundation, about ¼ of those taking prescription drugs find them unaffordable.
Our exorbitant drug costs are mostly driven by single-sourced, brand-name specialty drugs. Large pharmaceutical firms (or smaller firms with hedge fund money) control up to 80 percent of drugs with the fastest-rising prices. Drug firms often cite development costs to justify their outrageous prices but the correlation between drug prices and development costs is uncertain[iv]. Most FDA-approved drugs originate from NIH-funded research in government or university labs. Since drug firms rarely disclose evidence, it is impossible to verify their claims.
So, American citizens are at the mercy of the pharmaceutical industry. Mergers, acquisitions and takeovers trim competition. Federal legislators weaken regulations. Big Pharma hijacks government-funded research, games patent laws and delays generic competition. Drug firms spend most profits on stock buybacks that maximize share value (primarily for mega-shareholders). Tax laws allow drug firms to repatriate offshore funds at low rates to hedge funds for stock buybacks.
Insulin, which 30 million US diabetics need to survive, accentuates the insatiability of Big Pharma’s pricing greed. Despite negligible development costs, drug firms price insulin at 30 times their production costs. From 1999 to 2019, US insulin prices soared from an average of about $20 to over $300, ten-fold the average insulin price in other developed nations. Insurers and pharmacy benefit managers (PBMs) collect rebates that, instead of being used to lower drug prices, expose beneficiaries to higher costs.
Profit-Driven, Unevenly-Regulated Innovation
We Americans like to think that we have the most innovative healthcare system in the world. That may be true, but it is especially true for practice areas with the greatest potential profits.
Despite a long decline in US research and development funding (as a share of GDP), we have witnessed exciting scientific advances like gene sequencing. We eagerly await new treatments for cancer, diabetes, Parkinson’s and heart disease. We can envision the disruptive impacts of promised innovations like artificial intelligence and digital diagnostics. And, while the consumer-health investment boom may have waned in recent months, the pandemic may have irrevocably increased demand for consumer-oriented healthcare services.
Unfortunately, healthcare innovation tends to favor the most profitable opportunities. Since 1980, most healthcare innovation investment has been in technologies with the most promising returns. Technologies with little short-term market potential are less likely to be funded and developed. Excessive reliance on privately funded Health Technology Assessments (HTAs) and patent-protected technologies leaves unpatented technologies overlooked, including those that could benefit millions, like mobile medical devices (e.g., (e.g., in-home blood-pressure devices) and hand-held diagnostic tools (e.g., ultrasound devices).
Inadequate oversight also impedes healthcare innovations. For example, since the FDA does not regulate lab-developed tests (LDTs) like they do commercially developed and marketed tests, unreliable LDTs can be sold to consumers for home use without external oversight [v]. The Theranos debacle, just one example of this regulatory loophole, could have been averted with better oversight. In contrast, by conducting emergency reviews of COVID-19 LDTs, the FDA helped developers correct design flaws and bring much-needed LDTs to consumers.
The Slow Acceptance of Telemedicine
The healthcare industry is slow to embrace cost-effective innovations that make healthcare more accessible to consumers. The best example of this resistance? Telemedicine, an online tool for remotely connecting patients and providers. It makes outpatient care more affordable and accessible, a great boost to rural areas where providers may be scarce. And it reduces the risks of transporting a fragile patient to a distant hospital.
For years, many providers have resisted telemedicine. For some, this reticence may come from a bias for in-person visits or simply against change. Even those willing to try telemedicine encountered state licensing rules barring telemedicine across state lines or antiquated reimbursement rules (e.g., Medicare). Consequently, only about ten percent of Americans used telemedicine services pre-pandemic.
The pandemic increased consumer demand for telemedicine services tenfold. Due in part to Medicare and state licensure changes, millions tried telemedicine for the first time during the pandemic. Telemedicine usage skyrocketed in hospitals, clinics and ambulatory care centers, and the emergency services arena. As such technology becomes more prevalent, it could significantly disrupt legacy healthcare services.
We can only hope.
[i] The underinsured spend a disproportionately large share of their income on healthcare costs.
[ii] Medicare/Medicaid spending has skyrocketed from one percent of total public spending in 1966 to over 20 percent today.
[iii] The Current Procedural Terminology (CPT) billing code system is a standard set of medical codes used by healthcare providers to classify procedures and report them to payers for reimbursement purposes.
[iv] A recent London School of Economics study found little if any correlation between research and development spending and high drug prices. Other studies have concluded that the costs of bringing a new drug to market are less than half that of Big Pharma estimates.
[v] LDTs are in vitro diagnostic tests designed, manufactured and used in a single laboratory (not sold to other labs for performing tests), often for the purpose of diagnosing widespread conditions like cancer or COVID-19.
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