Health: The Right Diagnosis and the Wrong Treatment

Steven Brill has achieved the seemingly impossible—written an exciting book about the American health system. In his account of the passage of the Affordable Care Act (now known as Obamacare), he manages to transform a subject that usually befuddles and bores into a political thriller. There was reason to think he might pull it off; his lengthy 2013 Time magazine exposé of the impact of medical bills on ordinary people was engrossing. But his success also owes much to the Bob Woodward method of writing best sellers about government policy: interviews with hundreds of insiders, many anonymous, some evidently willing to talk to him to increase their chances of being shown in a favorable light.

For example, one of Brill’s principal sources and a great favorite is Liz Fowler, chief health counsel to Senator Max Baucus, chairman of the Senate Finance Committee, which oversaw the legislation. Brill credits her with being “more personally responsible than anyone for the drafting of what became Obamacare.” He is unbothered by the fact that she was vice-president for public policy at WellPoint, the country’s second-largest private insurance company, before taking her job with Senator Baucus, or by the fact that shortly after passage of the law (and a brief stint with the administration), she became head of global health policy at the drug company Johnson & Johnson—even though both of these industries benefited greatly from Obamacare.

By contrast, Brill is appropriately critical of others who used the revolving door between industry and government, such as Billy Tauzin, the congressman who pushed through the industry-friendly Medicare drug benefit in 2003 and then became head of the pharmaceutical industry’s trade association. The excuse he gives for Fowler is that she was not a lobbyist, but that is hardly the point.

In view of his method, it’s not surprising that there is as much political gossip and score-settling in Brill’s book as analysis. Nevertheless, his description of our dysfunctional health system is dead-on. He shows in all its horror how the way we distribute health care like a market commodity instead of a social good has produced the most expensive, inequitable, and wasteful health system in the world. (The US now spends per capita two and a half times as much on health care as the average for the other OECD countries, while still leaving tens of millions of Americans uninsured.) Brill makes it clear that the problems are unlikely to be fixed by Obamacare. For that alone, his book deserves to be widely read.

Here are a few items in Brill’s indictment. “Healthcare,” he writes, “is America’s largest industry by far.” It employs “a sixth of the country’s workforce. And it is the average American family’s largest single expense, whether paid out of their pockets or through taxes and insurance premiums.” He estimates that the health insurance companies employ about 1.5 million people, roughly twice the number of practicing physicians. Hospital executives preside over lucrative businesses, whether nominally nonprofit or not, and are paid huge salaries, even while they charge patients obscene prices (Brill cites $77 for a box of gauze pads) drawn from “what they called their ‘chargemaster,’ which was the menu of list prices they used to soak patients who did not have Medicare or private insurance.” He tells us that the CEO of New York–Presbyterian Hospital, where he had major surgery shortly after his article appeared in Time, had an income of $3.58 million. And finally, he gives us the really bad news: “All that extra money produces no better, and in many cases worse, results.”

When Barack Obama became president in 2009, reforming the American health system was at the top of his domestic agenda—ahead even of the banking crisis, housing foreclosures, and unemployment. And he was candid about the reason: soaring health costs were undermining nearly everything else. As examples: Medicare—the government program for Americans over age sixty-five—was a growing contributor to federal deficits; businesses that offered health benefits to their workers were at a competitive disadvantage, both domestically and globally; workers were afraid to leave jobs because they would lose health insurance if they did; and medical costs had become the chief cause of personal bankruptcy. In short, the American health system was no longer supportable.

When Obama was a state senator in Illinois, he was on record as favoring a single-payer health system—that is, one in which the government ensures health care for all residents of the country and regulates the distribution of resources in a predominantly nonprofit system. That’s the sort of system every other advanced country has. Even after he became president, Obama acknowledged in a press conference on July 22, 2009, that a single-payer system was the only way to achieve universal health care. Even so, except for that one admission, there was no further consideration of single-payer health care—by Obama or, crucially, by Senator Baucus—during the year Obamacare was crafted.

Instead, the launch of the reform effort was a White House media event in March 2009 that featured spokespersons for the for-profit health insurance and pharmaceutical industries, who pledged to work with the president to reform the system. But not for nothing. As a condition of its support, the insurance industry demanded that all Americans—except those in Medicare and other government programs—be required to purchase private insurance. The central role of the insurance industry would thus be not only preserved, but expanded and enshrined by law. As a condition of its support, the pharmaceutical industry demanded the continuation of two laws that Obama, as a candidate, had promised to try to overturn—one that forbids Medicare from using its purchasing power to control drug prices, and another that forbids Americans from importing cheaper drugs from other countries.

After these deals were struck, there followed a year of congressional wrangling, replete with further deals to mollify conservatives and the health industries. For example, the idea of a “public option,” that is, government-sponsored insurance to compete with private insurers, was scuttled. The final product—the Patient Protection and Affordable Care Act—was signed into law on March 23, 2010, and scheduled to go into effect over ten years, with the major provisions in effect by 2014.

There were three essential elements of the new plan for expanding access to health care: first, the new law encouraged employers to provide health benefits to workers by fining large companies that don’t offer insurance and subsidizing small companies that do. Second, Medicaid, the program for the poor, which is jointly supported by the federal and state governments, was to be expanded to cover an additional 16 million people. And third, everyone under age sixty-five without employer-sponsored insurance or Medicaid—estimated as another 16 million people—would be required to purchase their own private insurance policies or pay a fine. But there would be subsidies for those earning less than four times the poverty level (it was anticipated that most uninsured people would qualify for them), and states would create shopping exchanges for individuals and small businesses to pool risks and offer a menu of approved plans. Those were the main provisions to extend coverage, but of the roughly 50 million uninsured Americans at the time, the new law would still leave about 18 million, or 6 percent of the population, without any coverage at all.

In addition to extending coverage, the law called for regulations to curb the worst abuses of the insurance industry. Insurers would no longer be permitted to exclude people because of preexisting medical conditions or to drop policyholders if they developed expensive illnesses. (They would, however, be permitted to charge those nearing Medicare age up to three times as much as younger customers.) Insurance companies would also be required to spend at least 80 percent of their premiums on medical services, instead of diverting over 20 percent to profits and overhead.

Financing the increased coverage would come from four main sources. First, the payroll tax that supports Medicare was to be increased for individuals who earn more than $200,000 per year or families that earn over $250,000 per year. Second, these same high earners would pay a 3.8 percent tax on unearned income, such as dividends or capital gains. Third, payments to Medicare Advantage plans would be reduced; these are government-supported private plans chosen by about a quarter of Medicare beneficiaries because they usually offer a broader package of benefits. The government had paid Medicare Advantage plans about 14 percent more than it would cost to cover the same people in ordinary Medicare. Fourth, beginning in 2018, there would be an excise tax on high-cost policies. There were also to be unspecified reductions in Medicare payments to hospitals and other health facilities, as well as a variety of small fees levied on health industry companies.

According to the Congressional Budget Office, these new funding sources, taken together, would more than cover the cost of the legislation to the federal budget. But costs to the private sector—businesses and individuals—were not addressed in the Congressional Budget Office analysis, nor was there any consideration of the growth in costs. The analysis was based on extremely optimistic assumptions.

During the five years since then, there have been a series of delays and setbacks. In 2012, the Supreme Court decided that while the mandate to purchase insurance was constitutional, the requirement that states expand their Medicaid rolls was not. As a result, even though the federal government would pay virtually all of the additional costs, twenty-two states have refused the offer, leaving millions of people uninsured who would otherwise be covered by Medicaid.

In addition, thirty-six states have refused to set up state shopping exchanges, so that their residents have to rely instead on the federal exchange, created as a backup, to buy subsidized insurance. But that, too, is now before the Supreme Court, because of the implausible claim that the wording in one part of the law means that only state exchanges may offer subsidies.¹ (A decision on that will probably come at the end of the Court term.) Payments to Medicare Advantage plans are still higher than costs for comparable patients in traditional Medicare. And finally, there have been delays in implementation for both businesses and individuals, partly as a result of the disastrous 2013 rollout of the Obamacare websites—something Brill describes well. Over the past few years, the rate of cost inflation in health care has slowed somewhat; whether as a result of Obamacare or the recession is unclear, but it is still higher than the general inflation rate.

Assuming the recalcitrant states come around and all parts of the law eventually go into effect, what are we to make of it? Brill is pessimistic, and so am I. He well describes the two principal causes of escalating costs in our current system: first, the overuse of exorbitantly priced tests and procedures by entrepreneurial providers responding to a fee-for-service payment system that rewards such overuse, and second, the existence of hundreds of private insurance companies that generate huge overhead costs throughout the system, much of which supports or counters bureaucratic efforts to avoid or minimize payments for patients’ care. Obviously, any health system reform must do something about these two drivers of cost inflation.

But Obamacare does very little about either of them. First, it does not change the entrepreneurial delivery system. Care will still be provided in for-profit facilities or nonprofit facilities that behave the same way, and doctors will still be paid largely on a fee-for-service basis, and the fees will still be skewed to reward highly paid specialists for prescribing as many procedures as possible. There is some language in the legislation about determining cost-effective practice and setting up demonstration projects that would pay doctors differently, but nothing specific. Moreover, the law actually forbids tying fees to findings from comparative effectiveness research. There has been an increase in the establishment of accountable care organizations (ACOs) that are paid a yearly fee to cover all a patient’s medical needs, but while encouraged, ACOs are not required by the law.

Second, private insurance companies will still be able to set their own premium prices, and since the legislation will pour more money and customers into the insurance industry, it amounts to a recipe for inflation. Some regulations to prohibit abuses can be circumvented, and as an official in the insurers’ trade association once told me, any adverse effect on the companies’ bottom line can always be offset by raising premiums. Right-wing critics have referred to the law as a “government takeover,” but it’s actually much closer to a “corporate takeover.”

In 2006, my state of Massachusetts enacted legislation that closely resembles the new federal law and indeed served as its template. The Massachusetts law was originally promoted as a way to contain costs as well as expand coverage; the theory was that as people became insured, they would seek care from primary care physicians instead of in more expensive emergency rooms. But as costs continued to grow rapidly, the rationale changed. The new story is that the intention all along was just to get everyone insured and deal with costs later. Almost all Massachusetts residents now have health insurance, but premiums, deductibles, and copayments have increased, and some people have found they cannot afford to use their insurance. Massachusetts now spends more per capita on health care than any other state, and health spending consumes over half the current state budget, at the expense of nearly every other state function—including education, public safety, human services, and infrastructure. Clearly, while it’s possible to expand access to health insurance by pouring money into a wasteful system, eventually the costs are shifted to patients in one way or another, and other important social goods are neglected.

Practically every serious economic analysis of the American health system has concluded that the most efficient way to provide care to everyone is through some form of single-payer system, such as Medicare for all, and that any other approach will eventually be unsupportable. Why, then, was a single-payer system excluded from consideration and its proponents almost entirely barred from the discussion during the year Obamacare was written? That rejection can only reflect the enormous power of the health industry, which Brill reminds us has the largest lobby in Washington, D.C., and gave millions in campaign contributions to the key legislators. Indeed, Senator Baucus received more money from the health industry that year than anyone else in Congress.

Much of the public opposes Obamacare, and it is often claimed that their opposition reflects a philosophic antipathy toward big government. While that explanation may be partly true, I think it’s largely a canard promulgated by the health industries and repeated by much of the media. The problem for most people, I suspect, is not the size of government, but the belief that government often does not work for their benefit, and instead serves special interests. I have no doubt that if instead of this reform, the plan had been to extend Medicare to everyone, most of the public would have been pleased. Polls have consistently shown that a majority of Americans favor such a system; the percentages vary according to the framing of the question, but they are almost always well above 50 percent.

Medicare is a government-administered single-payer system similar to Canada’s. It’s the most popular part of the US system, because it covers nearly everyone over the age of sixty-five for the same package of benefits, no matter what their medical condition; many sixty-four-year-olds can hardly wait to be sixty-five, so that they can get on Medicare. I’ve advocated gradually extending Medicare to the entire population by dropping the qualifying age one decade at a time—starting with age fifty-five. However, Medicare uses the same entrepreneurial providers as the private system, and its expenditures are rising almost as rapidly. Therefore, we would need to convert to a nonprofit delivery system, and we would need to stop preferentially rewarding specialists whose practice consists mainly of procedures. Paying doctors by salary makes the most sense.

Brill has a very different proposal. First, he documents the major responsibility of “brand-name” hospital conglomerates, such as New York–Presbyterian, for driving up health costs. They do so by their relentless expansion to push out competitors, their acquisition of large networks of physicians and outpatient facilities to feed them, the breathtaking prices they command from insurers that dare not refuse, their lush operating profits of on average about 12 percent (whether they are technically nonprofit or not), and their heartless pursuit of full payment from uninsured patients even while they pay their executives multimillion-dollar salaries.

Brill then comes up with this solution to our health care problems:

Let these guys [i.e., the hospitals] loose. Give the most ambitious, expansion-minded foxes responsible for the chargemaster even more free rein to run the henhouse—but with lots of conditions.

His notion is that the hospitals would provide one-stop shopping for employers or individual customers, including acting as their own insurers. A customer would simply sign up at, say, New York–Presbyterian, which would provide everything for a set price; no more fee-for-service. Customers would buy the brand, and everything else would follow.

But, says Brill, there would have to be seven conditions to force these hospital conglomerates to behave better than they do now. First, “that any market have at least two of these big, fully integrated provider–insurance company players.” If there were only one, its profits should be controlled like a public utility. Second, whether oligopoly or monopoly, operating profits would be capped “at, say, 8 percent a year.”

Third, there would be “a cap on the total salary and bonus paid to any hospital employee who does not practice medicine full-time of sixty times the amount paid to the lowest salaried full-time doctor, typically a first-year resident.” At the University of Pittsburgh Medical Center, where starting residents make $52,000, that would be $3.12 million.

Fourth, there would have to be a “streamlined appeals process” for patients who felt they had been denied adequate care.

Fifth, the CEOs of these hospitals would have to be physicians who had practiced medicine for a minimum number of years.

Sixth, the hospitals would have to insure a minimum percentage of “Medicaid patients at a stipulated discount.” And seventh:

These regulated oligopolies would be required to charge any uninsured patients no more than they charge any competing insurance companies whose insurance they accept, or a price based on their regulated profit margin if they don’t accept other insurance.

That’s quite a list. Brill ends by pronouncing his dream of a system “certainly more realistic than pining for a public single-payer system that is never going to happen.” I disagree. The foxes out there now would simply not accept such constraints. After all, their diet is hens.

Shortly after the appearance of his Time article, Brill was diagnosed with an aortic aneurysm that required open-heart surgery, which was successfully performed at New York–Presbyterian Hospital (at a charge of over $190,000). As a result, he became enamored (there is no other word) with the hospital and its CEO, Steven Corwin, a heart surgeon. He also interviewed other physician-CEOs of large hospital conglomerates, including Delos “Toby” Cosgrove of Cleveland Clinic and Gary Gottlieb of Partners HealthCare in Boston. With very little reason other than their words, he decided that they were inherently less avaricious than other hospital CEOs. At one point, he asks rhetorically whether CEOs should “have all that power” that his hypothetical system would give them, and answers:

That’s where doctor-leaders like Corwin, Steele [Glenn Steele of Geisinger Health Sytem], Gottlieb, and Cosgrove come in…. Allow doctor-leaders to create great brands that both insure consumers for their medical costs and provide medical care.

His high regard for New York–Presbyterian, and by extension similar institutions, is at odds with his hardheaded finding that while the US spends more on health than other developed countries, that does not buy it better health outcomes. He nevertheless seems to believe that the biggest, richest “brands” provide better care. Perhaps it helped that he got good care in one of them. But there is no reason to believe that his surgery would not have gone equally well with another surgeon at another hospital. Attempts to gauge quality, as, for example, by state tallies of surgical outcomes, which he reviewed to evaluate his surgeon, are necessarily crude and can be gamed, and Brill is too accepting of them.

Similarly, while I agree that hospital CEOs should be physicians, I don’t see any evidence that they are less vulnerable to the drive to maximize profits. The doctor-leaders Brill interviewed claimed that their high prices were necessary to cover their efforts to improve quality, but their operating profits after those expenditures are still as high as hospitals without doctor-leaders, and they are evidently no more magnanimous to uninsured patients.

Brill’s view that hospital conglomerates should serve as their own insurers also seems at odds with his earlier analysis. In the system he envisions, he wants insurers and providers to be on the same team, so that their interests are aligned. But elsewhere in the book, he points out that insurers are the only brake on providers’ rising prices. He writes that in 2009 insurers’ “tight profit margins were dwarfed by those of the drug companies, the device makers, and even the purportedly nonprofit hospitals.” He argues that insurers “are the only industry players who, however unsympathetic, are on the customer and taxpayer side of the divide. Like us, they buy health care.” It’s not clear to me that insurers are on the customer side of the divide, but it’s true that in our fragmented, uncoordinated system, there is some advantage to not having interests aligned. Let’s look at how those interests line up now.

Employers and insurers, including government insurers, have every incentive to stint on care. The best way to do that is to refuse to insure high-risk people at all or to put a cap on their coverage (something that Obamacare is designed to prevent), to shift costs to patients at the point of service by increasing deductibles and copayments, and to limit the benefit package. In contrast, hospitals and other facilities have every incentive to expand, so that they’re in a better position to bargain with insurers for higher prices. Brill tells us that New York–Presbyterian Hospital gave his insurer, UnitedHealthcare, a discount on prices of only 12 percent, but UnitedHealthcare could demand discounts of 30 to 60 percent from other hospitals.

For the most part, physicians just want to maintain their income, even as their influence wanes. Increasingly, as the struggle between insurers and hospital conglomerates grows, they are becoming absorbed by one or another of these two forces. But they are still paid mainly by fee-for-service, and those fees are skewed to reward tests and procedures. Procedure-oriented specialists thus have every incentive to do as many of them as possible, particularly when unit prices are controlled. In his disturbing new book, Doctored: The Disillusionment of an American Physician, Sandeep Jauhar describes cross-referrals among friendly colleagues simply to increase all their incomes.²

Note that none of these three disparate incentives I have described is designed to improve patients’ health. Until they are aligned to do that, and not just to serve the interests of parts of the system, we should be wary of aligning them. Which of them, after all, would we choose to win out? To the extent that they now cancel one another out, eliminating one might make matters even worse.

The fundamental issue in the US health system is costs. After all, if money were no object, everyone could have all the health care he or she could possibly need or want. But money is an object, and sadly, the Affordable Care Act is a misnomer, because it’s not really affordable except in the short run. Yes, it has expanded access, but the costs will not be sustainable—unless deductibles and copayments are greatly increased and benefits cut. That is happening now, particularly in the private sector, where employers are also capping their contributions to health insurance.

The problem is that Obamacare attempted to reform the system, while retaining the private insurance industry and the profit-driven delivery system with all its distortions and waste. Obamacare even made the private insurance companies the linchpin of the reform, providing them with millions more publicly subsidized customers. At the time Obamacare was enacted, its supporters argued that anything else was politically unrealistic. In view of our industry-friendly politics, that may have been so, but that does not mean that Obamacare can work. It’s unrealistic for different reasons.

Until we begin to treat health care as a social good instead of a market commodity, there is simply no way to make health care universal, comprehensive, and affordable. Brill’s book is a superb, even gripping, description of the American health system and the creation of Obamacare, but he is misguided in his recommendation for reform by turning over the administration of the health care system to hospitals. The last thing we need is more foxes guarding the henhouse.