Why Healthcare is Expensive

I promise to write shorter articles from here on out....

The motivation for this article is a combination of things, including the fact that most doctors do not control the cost of their services and that poor people are financially stressed enough that they should stop paying for rich peoples' healthcare. Why should a rich old person have their knee replacement completely covered by taxes from the poor?

Rethink Healthcare Pricing

A heart transplant is billed at $1.3M. 

When an ER doctor places a central venous catheter (CVC), basically a large IV for the critically ill, the hospital bills insurance $3000 dollars and the patient $1000 dollars. 

The hourly cost of CVC placement, which takes ten minutes, equates to nearly $20,000 per hour. 

Why are healthcare prices so high? In short, the Center for Medicare and Medicaid Services (CMS) dictates prices.

The longer answer is that the CMS inflates prices because they are obligated to cover expenses for those who do not contribute to their medical bills: the elderly and low-income groups. This is obvious, however there are more interesting details to the story that should trigger a collective rethinking of our current healthcare pricing model.

To start, the top 1% of healthcare spenders (“super-spenders”), who are mainly over 65, account for 20% of all healthcare dollars and average around $120,000 per person annually.

While the elderly certainly have serious healthcare needs, why not have them pay insurance premiums and co pays like the rest? After all, they’ve had a lifetime to save. 

Further, holding elderly accountable for their medical finances might also encourage more financial planning and healthier life decisions like reducing stress and eating right.

Holding our older population financially accountable for their bills is more sensical than continuing to tax both businesses and employees 1.5% to maintain a poorly managed CMS system under the guise that if elderly (and indigent) were left uninsured it would cause financial devastation to the healthcare system. This hypothetical crisis presupposes that seniors would not obtain some form of health insurance without the CMS, which is highly unlikely. 

The cost to the system of caring for the few who choose to go uninsured would also be a non-issue if healthcare prices were affordable to begin with. Prices will be affordable without CMS-dictated medical pricing that is so offensively inflated as a result of bundling in costs of caring for all who can not (low-income) or do not have to (elderly on Medicare) contribute to their medical bills. 

Despite inflated charges, Medicare patient care is horrendous, by any metric. Between 2023 and 2024, Medicare Advantage patient experience survey ratings fell from 4.5 to 3.5. [ Medicare Advantage is essentially Medicare-governed insurance for services like wellness and fitness, hearing, dental and eye care. ]

If you think that CMS pricing only impacts Medicare and Medicaid patients  (40% of the $4T annual national healthcare expenditure), think again. 

CMS pricing has forever been the benchmark that hospitals use to bill patients with private insurance and those paying out-of-pocket (accounting for 30% and 10% of annual national healthcare expenditure, respectively).

CMS driven price inflation for all patients is going to worsen with expanding Medicaid. 

State programs like California’s Medi-Cal expansion in January 2024, extending coverage of undocumented immigrants to include all ages adds another 700,000 individuals the CMS must ultimately account for in their medical services price setting. 

Other states are also actively pushing for Medicaid expansion. In February 2024, according to Georgia.gov, Governor Kemp announced a lawsuit against the CMS to expedite a prior deal to expand Medicaid for the state’s low-income brackets. 

As one example of private insurance costs rising, according to the Kaiser Family Foundation, in 2022, even with Affordable Care Act (ACA) subsidies, premiums overall went up. Silver plans increased by 4.1%. Bronze plans by 4.0%, and Gold plans by 2.2%.

Taxpayers, on whom we know the burden of these inflated costs fall, should be outraged. In particular, that the CMS, a government based program, is allowed to engage in price-fixing in the first place. Ironically, it was a federal government law passed by President Harrison in 1890, the Sherman Antitrust Act, that was created to avoid price-fixing.

Unfortunately, the first U.S. antitrust law, intended to prescribe a rule of free competition in commerce, has been ignored by the institution that created it. It would be no surprise then if the CMS was a private entity it would find itself in court for price-fixing, in addition to the numerous ongoing suits filed against it.

In mid 2023, The National Association for Home Care & Hospice (NAHC) sued the CMS after the agency proposed home health payment cuts, derailing much needed and cost-effective healthcare.

The value of home health in terms of both cost savings and patient care is underscored  by recent national data out of Massachusetts General Hospital and Brigham and Women Hospital. 

In January 2024, these hospitals published data on 5,858 home health patients, showing low rates of mortality, less use of skilled nursing facilities, and less need for escalation of care (or transfer to a hospital). Home health works. 

The solution to inflated medical costs is a swift replacement of price-fixing by the CMS with a free-market system. This of course is not going to happen simply because the CMS has government protection and is an economic powerhouse accounting for nearly 20% of US GDP.

However, we should move towards a system where government and private healthcare insurance firms stop colluding. 

Healthcare prices should be at least partially determined the same way as in any other industry: by those carrying out the services. In this case, physicians, nurses and other clinicians need to have more pricing input.

“Entitlement” programs, Medicare and Medicaid (the CMS), ideally should end to better serve all patients. If the CMS is sticking around, they must at a minimum maintain patient quality standards to retain funding. Medicare survey ratings should not be allowed to fall a full point for an entire year (as they have) without grave intervention. 

These programs should also ideally be transitioned from government run and tax-based to privately managed with individuals deciding to contribute to personalized plans. The “super spenders” probably should buy platinum plans. 

If a government-run Medicare-like program must exist, it is prudent not only to ask patients to contribute financially, but to consider raising the age of enrollment. Otherwise the rise in life-expectancy, a generally good thing, could lead to rising healthcare costs since the CMS will be covering an expanding population. Surprisingly, between 1900 and 2000, average life expectancy increased between 60% and 120%, for white men and black women, respectively. 

One major benefit to patients being more financially responsible for their medical bills is a concomitant reduction in frivolous visits to the ER. Currently, of all ER visits, only 5% are true emergencies, and the rest can be handled by primary care offices. 

The average cost for an ER visit is around $2,500 in contrast to the price of an established primary care office visit in California, around $100.

Without Medicaid, the indigent won’t be “left behind” as many argue. One reason is that prices would likely be much more affordable without entitlement programs.

An existing safety net is existing national philanthropy for the lowest income brackets. According to the National Philanthropic Trust, in 2022, Americans gave $499.33 billion. Foundation giving was $105.21, by bequest was $45.60 billion and corporations provided $21.08 billion. 

While the majority of these charitable dollars has historically gone to religious venues, ten percent went towards health in 2022. In the same year, fourteen percent went to human services and eleven percent towards grant foundations. As philanthropy in healthcare and related areas continues to rise as it has the last few years (increasing about 5% per year) this will serve as profound protection for the groups who need it most.

In addition to philanthropy, several other contributors will help prevent low-income brackets from suffering insufficient and unaffordable healthcare if Medicaid were to close shop. One is an immensely impactful population of volunteering community service members. Another is health-technology innovation driving down healthcare costs.

Without the CMS inflating healthcare prices, including for medical equipment, there would be less barrier to entry for new businesses, who could afford opening shop. A lower cost of entry for new business would be buttressed by reduced complexity to reimbursement as a result of not having to deal with a bureaucratic system like the CMS. 

New businesses lead to competition and innovation of medical devices and manufacturing processes which will in turn reduce production costs, and ultimately the prices of novel, world-class healthcare products and services.