The way we deliver and pay for healthcare in the United States has changed a lot over time. So has the cost. Going back only as far as 1960, we spent a modest 5% of gross domestic product (GDP), or $146 per person on healthcare, versus 18% of GDP and $10,739 per person now (Amadeo, 2020). How was this paid then and now? There was a time at the beginning of the twentieth century when people paid cash for healthcare and did not rely on insurance. So it all started with us paying for healthcare directly, and healthcare was not that expensive (less than 5% of GDP). I am not suggesting we should return to those days, but it is interesting to note and remind ourselves that healthcare and access to healthcare is not the same as insurance. News flash: You actually can get (typically lower cost) healthcare without using insurance! This is called self-pay or direct pay healthcare, and it is a growing trend among consumers who cannot afford high co-pays and deductibles, even with Affordable Care Act (ACA) plans (Parnell, 2014). As healthcare consumers, we typically assume that the only way to get healthcare is with insurance and that access to good healthcare is synonymous with access to good insurance. That, after all, is what the ACA is all about. It is about making sure that everyone has insurance, not necessarily about making sure everyone has access to good healthcare. But these are different concepts, even if you do not see that yet. Please bear with me on this, as a central thesis of this chapter is that how we do insurance, by letting surrogates act on our behalf, is at the root of why healthcare is so expensive in America.
What Is Insurance?
It seems simple enough—the insurance company, our surrogate—reimburses us for medical expenses. This is for everything from routine checkups to emergency room (ER) visits, to open-heart surgery to infusion therapy for cancer. But how does most insurance, outside of healthcare, work? Think of your car or home insurance. If you totaled your car or your home was destroyed in a fire, insurance pays to help you recover from these rare but catastrophic and financially devastating events. For more routine problems, like a dead battery or alternator in your car, or a broken water heater in your home, you pay for those directly with cash or credit. Healthcare insurance is not like that. It is not like insurance at all. We expect healthcare insurance to pay for everything, even routine doctor visits that would cost less than $100 if we paid cash but will be billed at much higher prices if we use insurance. But then why do we care as long as it is reimbursed, right? That is a problem that I will get to later, but for now suffice to say that the prices charged to insurance companies are highly inflated and do not likely reflect actual costs, so you do not ever want to pay those prices. And yet you typically probably do pay those inflated prices as you work toward hitting your deductible if you use insurance. On the positive side, though, you think that everything is largely free for you after that deductible. Many of us go on a healthcare spending spree at the end of the year after we have hit our deductibles—and why not? Of course, now that we have increasingly large deductibles and co-pays, we are actually starting to care and would like to avoid these large price tags for doctor and especially ER visits altogether. Interestingly and surprisingly, the co-pays or deductibles that we pay are typically larger than if we used a self-pay approach, but we do not do that because we believe that it is not possible to not use insurance and instead pay directly since we wrongly believe that all healthcare must be “purchased” using insurance. The point is, healthcare insurance is not insurance in the way we typically think of insurance, and we have become so accustomed to this idea that we as healthcare consumers are paralyzed in the absence of insurance, even when the most logical thing to do is to not use it. Unfortunately, the healthcare system is not currently set up to let us easily purchase without insurance, often forcing us to pay the inflated prices that providers charge insurance companies and not telling us, up front, what things would cost if we did want to pay cash. That is changing now. This phenomenon, and the potential solution of paying directly and only using insurance for expensive needs, is the central thesis of a 2013 book by David Goldhill entitled Catastrophic Care. Goldhill argues that we would be better off treating healthcare insurance like other forms of insurance and paying for routine healthcare needs using cash, perhaps from health savings accounts (HSAs) paid for by employers and others. This leverages market forces to control cost and makes the patient the real customer rather than some disinterested surrogate (government or insurance company). Goldhill is probably in large part correct, but I am getting ahead of myself. Back to the history of healthcare delivery and insurance in America.
The History of Healthcare Insurance
During World War II, President Franklin Delano Roosevelt (FDR) passed the Stabilization Act (1942) as part of his wartime effort to control inflation by freezing wages, salaries, and prices. To deal with a labor shortage, companies needed to find creative ways to attract employees, and since they could not offer increased wages or salaries, they offered benefits in the form of healthcare insurance. That is how healthcare insurance became linked to employment, and it has been that way since. So the fact that we get our insurance from our employers is a “wartime accident” (Mihm, 2017). In this regard, the United States is somewhat unique in the world, since most other countries, with the exception of Japan (Ellis et al., 2014), do not couple healthcare insurance with employment. To address frustrations with this system, some have proposed national healthcare.
There was no national healthcare in the United States until the introduction of Medicare and Medicaid on July 30, 1965, when President Lyndon B. Johnson signed into law the bill that created it. It started as Medicare Part A (hospital insurance) and Part B (medical insurance) and was expanded further in 1972; Medicare Part D, created under the Medicare Prescription Drug Improvement and Modernization Act of 2003, added prescription drug benefits (Centers for Medicare and Medicaid [CMS], 2020). Today, Medicare and Medicaid are managed under the Department of Health and Human Services within the CMS, currently under the leadership of Alex Azar II and Seema Verma, respectively (U.S. Department of Health and Human Services [HHS], 2019a). Medicare is available to anyone age 65 or older, and Medicaid is available only to low-income families under the age of 65, with income at or below 133% of the federal poverty level (CMS, n.d.). The only other public and federally funded national healthcare insurance in the United States is TRICARE, for current and former members of the military (TRICARE, n.d.). Medicare, Medicaid, and TRICARE are kinds of national public insurance.
Private insurance, typically paid for by employers since World War II, has evolved significantly over the years. One interesting period of development was in the 1970s and 1980s, when HMOs became popular. HMOs began in 1970 as a response to concerns over increasing costs and because of growing public demand for national healthcare. President Richard Nixon’s administration responded with the HMO Act of 1973, which led to the growth of HMOs in the 1980s with around 30 million participants in 1987 (Gruber et al., 1988). But consumer frustration over limited choices for providers and services began to kick in around 1987 (Gruber et al., 1988). Around that time, HMOs began to decline in popularity. The decline and dissatisfaction peaked in the 1990s. The generally accepted reason for the decline of HMOs was summarized in a CommonWealth Magazine article:
Patients complained about services denied and referrals refused, but the disgruntlement actually started among physicians. Most doctors working under HMOs … preferred the traditional practice model (choice of provider, choice of treatment, fee-for-service payment), but that model had become too costly for many employer groups. Feeling coerced by market forces, doctors complained to their patients. (Enthoven, 2005)
On a more positive note, the National Bureau of Economic Research (2020) reported how medical spending decreased during the time when HMOs were popular. After HMOs went out of vogue, healthcare costs resumed their relentless increases, much higher than inflation. Two clear lessons from our exploration into HMOs emerged: (a) Some logical constraints on healthcare spending actually help to control costs, and (b) Americans do not like constraints on their healthcare choices (Enthoven, 2005).
The failure of the HMO system, which was intended to provide more efficient and effective healthcare, led some to conclude that we needed more portable health insurance that was separate from employer-based insurance, like the statewide nonemployer-based plan proposed by Republican Curt Gielow and Democrat Jon Richards in Wisconsin (Enthoven, 2005). That plan, called the Wisconsin Health Plan (presented by Curt Gielow in chapter 20), would have provided a choice of health plans and would have supported and created integrated-delivery HMOs without as many restrictions as the HMO system that was once prevalent. But it never became a reality and was controversial because it was, at the state level, universal care that was to be financed by a payroll tax. It was a failed attempt at a Purple solution for a safety net.
After HMOs, healthcare costs resumed their continued rise, and the industry continued its trend toward increasing levels of consolidation, facilitated by a number of factors that included federal regulatory constraints and incentives that favored large consolidated providers (see more on this in chapters 4 and 5). This situation led to the growth of what some have cynically called the Medical-Industrial Complex (MIC). This term is a reference to President Dwight Eisenhower’s 1961 warning about the “military-industrial complex,” which he feared would have excessive economic and political power. Dr. Arnold Relman wrote an article raising concerns about how the increasingly consolidated healthcare industry is focused too much on profit maximization and is putting physicians under pressure to themselves be financially motivated to provide excessive services and procedures, even if not in the best interests of the patient (Relman, 1980).
Most recently we had the passage of the Patient Protection and Affordable Care Act of 2010 (ACA), which permits people to buy private insurance on private exchanges. It was an attempt at universal healthcare but using publicly financed private insurance purchased on exchanges. These insurance plans, as well as the most prevalent employer-sponsored insurance plans, are evolving increasingly into high-deductible plans (Cohen & Zammitti, 2018). These deductibles are so painfully high for the average American family that it is almost like not having insurance or having what is called catastrophic care insurance. The average deductible for a family in 2019 was $3,700 for employer-sponsored plans, with 14% of deductibles being more than $6,000 (Masterson, 2019). Within the ACA exchanges, the high-deductible plans, called the bronze plans, require you to pay 40% of your healthcare costs, with an annual out-of-pocket maximum of $7,900 in 2019 (HealthPocket, 2020). How many families can afford $7,900 or even $3,700 in a given year, in addition to their monthly insurance premiums, whether through the ACA or their employer? This is not ...