How to Reduce Health Care Costs: Understanding the Cost of Health Care in America

June 27, 2018 • Testimony

How expensive is health care in the United States, and who pays? Why is American health care so expensive? And what should we do if we want to make health care in the UnitedStates less expensive? My testimony provides responses to each of these questions, and highlights areas of agreement and disagreement.

First, a solid body of research makes it clear that high prices are a major factor in why American health spending is so high. For example, a study published in 2018 found that “prices of labor and goods, including pharmaceuticals, and administrative costs appeared to be the major drivers of the difference in overall cost between the United States and other high‐​income countries.” To be sure, there are various complications, including a variety of volume/​composition differentials that must also be taken into account. And, there is tremendous waste, fraud, and abuse in our health care system.

Viewed from a different perspective, the American health care system is expensive because every incentive points in that direction. Our reliance on open‐​ended third‐​party payment seems designed to funnel money from the rest of the economy into the health care system. In health care, we have relatively few constraints – whether on the supply‐​side or on the demand‐​side, and whether on price or on volume. Previous attempts to impose such restraints have predictably given rise to cries of “rationing,” followed by lobbying and lawsuits. The consequences are easy to see.

Open‐​ended third‐​party payment has given us a health care system we can’t afford. If we don’t like things the way they are, we need to change the incentives under which our health care system operates. My forthcoming book, Overcharged: Why Americans Are Paying Too Much for Health Care, is full of ideas on how to do that. A partial list would include the following:

  • Encourage market entry, particularly by lower‐​cost providers.
  • Rely more heavily on first party payment.
  • Subsidize those in need by giving them money, rather than open‐​ended insurance.
  • Minimize mandated benefits.
  • Increase competition in the market for generic drugs with (i) increased antitrust enforcement; (ii) priority review of ANDAs for generic drugs that have experienced price hikes, (iii) prevent misuse of the FDA’s processes to slow generic entry; and (iv) relax the FDA’s grip on market entry.
  • Move as many drugs as possible from Medicare Part B to Medicare Part D.
  • Eliminate the requirement that Medicare Part D plans cover all approved drugs in the six “protected classes”: immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics.
  • Move as many drugs as possible from prescription‐​only to over‐​the‐​counter, or behind‐​the‐​counter.
  • Adopt strict payment neutrality regardless of the site in which care is delivered.
  • Adopt competitive bidding for Medicare Advantage.
  • Use prizes (rather than patents) to encourage drug innovation.
  • Improve transparency of information on pricing and quality.
  • Address charge‐​master abuse by enforcing basic contract law principles. Failing that, cap out‐​of‐​network bills at Medicare’s payment rate + a modest percentage.

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