Here's a Health-Care Model for Bezos, Buffett and Dimon: Medicare
Warren Buffett has long decried the ballooning cost of health care as a “hungry tapeworm on the American economy,” eating up the country’s wealth from within. Evidently, Jeff Bezos and Jamie Dimon all feel the same way, as evidenced by the recent joint announcement by their three companies, Amazon, Berkshire Hathaway and JPMorgan Chase, of their plan to form a new entity that will tackle the high costs associated with U.S. health care. In a tortuously phrased press release, the announcement proclaimed that the new company would be “free from profit-making incentives and constraints,” but an Amazon spokesperson declined to comment on whether the entity would actually be a non-profit.
It seems a pretty squirrely way of admitting that our current system, dominated by for-profit private insurance, does not represent the optimal means of delivering health care. The call to action also implies that the three executives have little faith that the magic of the market on its own will somehow manage to provide insurance so cheap that everyone will be able to afford it whatever their income and medical status. Buffett himself has long been in the skeptics’ camp. As early as 2010, he opined that the current system was “hurting the U.S. economy in relation to other developed nations where costs are lower, even though there are more doctors, nurses and hospital beds per person… we have a health system that, in terms of costs, is really out of control. And if you take this line and you project what has been happening into the future, we will get less and less competitive. So we need something else.”
But what is that “something else”? First, if we want a system “free from profit-making incentives,” it makes little sense to construct it around the for-profit private health insurance oligopoly as we have today. That’s long been the flaw behind the current U.S. health care system. Neither Obama’s Affordable Care Act, nor the subsequent GOP efforts to repeal and replace it, have fundamentally uprooted that structure, which largely came about via a historic quirk, rather than a conscious policy decision. Second, it’s unlikely that reform can be achieved by these three companies alone, because as big and powerful as they are (employing more than 1.1 million people), they likely don’t have enough leverage to force health care providers (who have tens of millions of customers) to do things differently.
In reality, if we want to find another way to simplify the complexity of our current system and also have the leverage to force cost reductions, we already have a pretty good model in existence. It’s called Medicare, a government program handling health care for anybody over age 65 (even as the delivery of that care remains largely in private hands). Furthermore, the people who run Medicare, unlike Amazon, Berkshire Hathaway, and JPMorgan Chase, have worked extensively in administering health benefits, and in managing doctors, hospitals or pharmaceutical companies. Medicare has enough customers to act as an effective single-payer. And unlike a private monopoly, Medicare does not tend to use its market power to reduce service, jack up prices, and inflate executive pay.
The mere mention of “single-payer” almost inevitably brings forth a chorus railing against the evils of “socialized medicine,” which is a misnomer, as in reality only our insurance is socialized. Insurance has been socialized for a good reason: we do not want insurers to exclude coverage because of pre-existing conditions, or deny treatment for expensive chronic illness. Hence, each insurer needs a pool of young and healthy people to buy into the system to subsidize the unhealthy. That was the rationale for the mandate under the ACA. Of course, it doesn’t sit well when one is mandated to pay what is functionally a tax to a private health insurer. So the best way to ensure maximum diversification (as well as greater popular legitimacy) is to put the entire nation’s population under one pool, which is what we already do for people over the age of 65 under Medicare.
As well as socializing the risk (and thereby helping to contain health care costs), health economist Robert H. Frank notes that Medicare’s administrative costs are substantially lower than a private health insurer, averaging only about 2 percent of total expenses, which is less than one-sixth the corresponding percentage for many private insurers. Frank explains that this occurs in large part because Medicare does not pre-screen anybody, and because the program:
“spend[s] virtually nothing on competitive advertising, which can account for more than 15 percent of total expenses for private insurers.
“The most important source of cost savings under single-payer is that large government entities are able to negotiate much more favorable terms with service providers. In 2012, for example, the average cost of coronary bypass surgery was more than $73,000 in the United States but less than $23,000 in France.”
France, incidentally, has better health care outcomes than the U.S.
It is worth recalling that Social Security is also a single-payer system, and both SS and Medicare remain two of the nation’s most popular entitlement programs. If you don’t believe that, see how many politicians successfully campaign on a platform of reducing or eliminating either program.
Bezos, Buffett and Dimon’s complaints about the rising costs of U.S. health care point to another issue: Why should the U.S., unique amongst western countries, continue to make health care a marginal cost of doing business in America by largely placing the burdens for health care provision on employers, rather than offering health care as a public good (especially as private employer-based health insurance is largely a product of historical accident rather than conscious policy on the part of either employers or the government)?
That historic quirk is outlined in the The Health Care Mess, a book co-authored by Julius Richmond and Rashi Fein. They describe how the current system arose out of the labor shortages created during World War II, which, in the absence of controls, would have left employers in a position to bid aggressively against one another in order to attract workers. The government introduced controls that prevented a wage spiral but did not include health care benefits, a loophole exploited by employers as a means of competing for workers. And as Paul Krugman and Robin Wells have noted, these medical benefits proved to be an attractive form of compensation for workers to the extent that they protected them from risk; additionally, employers liked the fact that the benefits were not deemed to be part of workers’ taxable income, thereby helping to moderate wage demands. This tax loophole is another factor that has contributed to rising costs.
Rising costs and waste were not a problem in 1960, when health care represented approximately 5 percent of GDP. Today, at 15 percent, it exposes U.S. businesses to substantially higher competitive pressures relative to other nations, which clearly provoked the response of Amazon, Berkshire and JPMorgan Chase.
Given the system’s immense profitability to Big Pharma and the private health insurers, no doubt they will mobilize aggressively against fundamental changes to the current system, whether it comes from the government or the private sector. However, the joint announcement from Bezos, Buffett and Dimon represents the latest acknowledgement that costs are still spiraling out of control and becoming economically unsustainable for American businesses. Even with the implementation of the ACA, U.S. health care provision remains far more expensive (as a percentage of GDP) than that of other developed capitalist countries, with no better outcomes—indeed, countries like Canada, France, Australia, etc., achieve similar outcomes while spending as little as half as much. Other countries use a wide variety of methods of provisioning and paying for health care, ranging from full-on “socialization” with government ownership of the hospitals (the UK), to market-based private ownership of medical practices. Many use a single-payer system (like Canada). Others, such as Australia, or Germany, use private insurers. As economist Randy Wray writes, “What is unique about the United States is that it relies so extensively on private for-profit insurers—in other countries that allow participation by private insurers, these are run more like heavily regulated, not-for-profit charities.”
There is nothing wrong with providing health insurance per se. Indeed, as Krugman and Wells note, the intrinsic costs of providing insurance are relatively low, with one proviso: the entire population be offered insurance in the absence of screening, with the annual premium struck at a level that covers the average person’s health care expenses and the insurance company’s administrative costs. This is effectively what Medicare does. But the rest of our U.S. health care system does not do this, even after the reforms introduced under Obamacare, as Dr. Stephanie Woolhandler, professor at CUNY-Hunter College and co-founder of Physicians for a National Health Program, remarked in a radio interview last June:
“[T]he ACA made some modest improvements to the healthcare system, and the Republicans would pull those all back. But the Affordable Care Act was never a very good bill. It left 28 million Americans completely uninsured and tens of millions more with these unaffordable gaps in their coverage, like copayments and deductibles and uncovered services. And that’s why the Affordable Care Act has been vulnerable to these Republican attacks, because people look at their own situation and say, ‘Even under Obamacare, under the Affordable Care Act, healthcare [is] still not affordable to me.’”
Even though Obamacare largely survived last year’s GOP efforts to eliminate it, some of its provisions have still been weakened under the recently passed Trump tax bill because of the repeal of the individual mandate (scheduled to come into effect in 2019). As unpopular as it was, the mandate had a certain logic behind it. It required most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, the elimination of which potentially reintroduces the “free rider” problem—the incentive to stay uninsured until or unless you get sick. If the young and healthy stay out, government subsidies must be higher, or premiums rise, or the insurers simply choose not to participate. The only other alternative of the insurance companies is routine denial of coverage for expensive treatments or medicines, or gradually breaching the rules pertaining to excluding people who have pre-existing conditions.
There are already signs of the latter. Last week, the Wall Street Journal reported that the Idaho Department of Insurance said that it would allow insurers in the state to begin offering “state-based plans” to consumers:
“These products could leave out some of the benefits mandated by the ACA for individual coverage. Insurers would be able to consider enrollees’ medical history in setting their premiums… which isn’t authorized under the ACA. The new state-based plans could also include dollar limits on total benefit payouts, which the ACA banned.”
The ability to “consider enrollees’ medical history in setting their premiums” sounds suspiciously like screening for pre-existing conditions which, the WSJ article notes, is illegal under the ACA. Given Trump’s oft-stated preference for letting Obamacare die, it is not inconceivable that he will tacitly connive with the “death by a thousand cuts” approach of Idaho (the Article II requirement that the president “take care that the laws be faithfully executed” notwithstanding, Trump has displayed little enthusiasm for the niceties of the Constitution since elected).
If our private health insurance model is indeed “a tapeworm” eating at the insides of the U.S. economy, then why not eliminate the parasite as a first step? Randy Wray and I have argued in this space in the past:
“Using insurers to provide funding is a complex, costly and distorting method of financing healthcare. Imagine sending your weekly grocery bill to an insurance clerk for review and having the grocer reimbursed by the insurer to whom you have been paying ‘food insurance’ premiums—with some of your purchases excluded from coverage at the whim of the insurer. Is there any plausible reason for putting an insurance agent between you and your grocer? No. Then why should an insurer stand between you and your healthcare provider?”
Health care is not synonymous with health insurance. And health insurance is very different from other forms of insurance. Generally, when one purchases insurance, be it home, fire, earthquake, valuables, etc., it is done with the hope that one never collect the benefits, whether that be because of a car accident, a fire to one’s home, or break-in where something of value is stolen. It’s a bad deal, but it’s supposed to be.
Personal health is different. Women “give birth astride of a grave, the light gleams an instant, then it’s night once more,” poignantly observed Samuel Beckett in “Waiting for Godot.” In other words, we are born, we get sick, and eventually we die. One can mitigate the effect of illness or poor health, but one cannot insure against death. While we do face health care expenses due to unexpected accidents, most of our health care needs are day-to-day routine things inextricably tied up with coping with the limitations of our mortality and genetic imperfections. In contrast to other forms of insurance, we buy health insurance, knowing full well that we’ll have to use it, often to prevent greater calamities later. And what insurers call “pre-existing conditions” is what the rest of us would call “genetic makeup,” a bundle of conditions we were born with, some better than others. Advances in genetic screening can be life-enhancing, but in the hands of a private health insurance company, one can imagine it becoming a recipe for exploitation in the form of variable premiums, depending on how well one scored in the genetic lottery.
Medicare is a program that commands huge political legitimacy and by and large works well. Yes, it is also understandably growing in costs, because its insured pool is restricted to the most elderly and potentially infirm in our society. If the young and healthy were introduced into the program, that would address this problem. Additionally, argues Professor Wray, “there is no possibility of shunting high-cost patients off to some other insurer. And total costs are lower because billing is simplified, administrative costs are reduced, and no profits are required for operating the payments system.” If Messrs. Bezos, Buffett and Dimon are serious in their professed goal putting their “collective resources behind the country’s best talent [that] can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes,” Medicare for All would be a good starting point.