Health Care in America 101: Part 2- Who Pulls The Strings?

In this second article on Health Care in America we will look at the key players in American Health Care.

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Welcome to Health Care In America 101! This is a primer. This is a continuation of a four part series looking at a pictorial guide to health care in the U.S. You can find the previous blog here:

Health Care in America 101: Part 1- Why is it F#cked Up?

We will revisit healthcare in this second blog on the health care state of the nation. I said in the first blog that something is not right in American Health Care and we pay too much for what we get.

The next step is looking at the players. Are doctors to blame? Is it the government? Read on.

I tried to make it a little fun, less words, more pictures. Click on any picture or graphic if you want more information.

Breaking down US Health Care expenditure, about 32% is paid to hospitals with physicians comprising up to 16% of health care expenditure. Medications make up 10%.:

This is what patients and consumers think drives expenses in health care:

If we breakdown the stakeholders into the big four, physicians, pharma (drug companies), hospitals and payers (health insurance companies) a clearer picture emerges of where the money goes. It’s a start but not the only reason for the expense.

1.    Physicians:

We said before that physicians contribute up to 15% of the health care spending. Is that really true? Add up all the physicians salaries and work it out as a percentage of health care spending and the real number is close to 7%:

Most lay people think that physicians earn too much. On a dollar basis they are in the top 1-5% of the country and higher than most other countries. The data is a little old but it the same message, physicians are generally paid more in the US than other countries:

There is a lot that is not covered in these numbers which include typical workdays, malpractice coverage, years to train and practice expenses which for most private practices sit at 50% of total revenue and up.

Take every dollar, cut it in half. Give half of the rest to the tax man. Rest is the docs. If you look at the raw salary number it gives a bloated figure. Also in most other countries medical education is subsidized.

In my community take home salary for my specialty (myself included) dropped 50% in just 5 years. Just this week I am told the local trauma center has effectively cut hospitalists salaries by 40%. I started medical school age 19. I did my first surgery as a specialist age 35. These things need to be taken into account.

Despite public perception, physician comprise a small part of government spending on healthcare, about 16% if it’s indeed that high, Practice costs have risen and real incomes have dropped. Most physicians have noted staggering rise in practice costs not matched by reimbursement. Physicians are not the problem.

The Government uses a conversion factor to work out what to pay physicians for medicare patients. Medicare rates are now the benchmark for most commercial payers. In real terms this has fallen so effectively what physicians are getting paid over the past 10 years has fallen:

If I send a bill the dollar value is pretty much ignored by a payer. Nowadays payers use medicare rates as the benchmark. Some may pay 150% of medicare, some have offered 85% of medicare. As the effective rate of medicare payments have dropped this means the amount paid by commercial payers has dropped. I worked harder in 2019 than 5 and 10 years ago, on sicker patients and got paid significantly less.

As we will discussed above, physicians start earning at a later time in life with long pathways to training, are saddled with loans of 100s of thousands of dollars and have high operating expenses in private practice due largely to the bureaucratic requirements of payers. Below is an interesting comparison:

It is interesting that if physicians are paid so well and the job is so rewarding why are there less and less? Think about when you see your doctor. Do you spend more time with the MA or a mid level? That’s becoming the new norm and medicine loses more and more skilled physicians and many retire early. Most jobs where the pay and conditions are good get oversupplied pretty quickly. This is the projected physician shortage in America which has already started:

So, physicians are = 13-16% of health care expenses in the US at most. Some say it’s less. Cutting physicians salaries will not solve the problem but may make the physician shortage worse.

At some stage as physician numbers fall, quality will fall, but costs will keep rising:

Physicians are the last bastion of advocacy for the patients. The have been gradually disempowered

Greater than 50% of physicians in America are now hospital employed, effectively muzzling them against speaking out for fear of job loss.

Burnout has become a key issue for physicians, many repulsed by the corporatization of medicine and health care delivery:

In short, as health care costs have bloated, physicians salaries have dropped.

Physicians have become disempowered, are mostly employed and muzzled and cannot advocate for patients.

An argument made my payers is that physicians will over-order tests, and this is partly driven by the litigious nature of U.S. medical practice and patient expectations. Note that it is rarely for personal financial gain.

It’s not the doctors that are making health care so expensive in the U.S.

2.    Pharma:

Drug pricing is a huge burden on the US consumer. We all feel it and we all know it. The growth is spending on drug price is matching clinical services:

Drug manufacturers do very well in the US. Drug prices are often the highest in the world and total spending on drug.

The U.S. is a cash cow for drug companies, bringing in more revenue than the rest of the world combined:

Regulatory control by the FDA mean the delivery of drugs is complex.

Note all the links in the chain. It is not transparent. There are middlemen who don’t make the drugs and don’t sell them but these middlemen (Pharmacy Benefit Managers PBMs) make the most, probably an unnecessary administrative burden we don’t need. Despite, this we know that drug manufacturers have high margins and do better than most other industries:

Drug companies will make many arguments including money spent on drugs that never make it to market, covering drug costs in less developed nations etc.

Despite the claims that significant portions of revenue are spent on research and development, most pharmaceutical budgets are spent on marketing:

Across the board for major pharmaceuticals the spending on research and development is less than we are lead to believe:

There was a time that U.S. consumers could get scripts filled in Canada and get them sent to the U.S. That no longer happens.

The arguments put forth (mostly by pharma and it’s representatives) were below but really big pharma did not want to lose revenue:

The truth is closer to this:

Finally the Government lets them get away with it by not negotiating drug prices, something that happens in other countries.

What can we conclude? Simply this: pharma does very well in the US. and the profits of drug companies are a big reason as to why health care is so expensive.

3.    Health Insurance Companies/Payers:

This is what our health insurance system feels like:

Payers and their administrators continue to post record profits:

The cost to us as a consumer of accessing that care has exploded as wages creep up slowly:

Our premiums and out of pocket have increased dramatically. So have payer profits:

It’s not rocket science to link the two:

Just follow the money:

If we look at billing and insurance-related (BIR) activities, the private insurers have also created the biggest burden:

In their quest to maximize profits and reduce services the private insurers have created a complicated web of prior authorizations and hurdles to health care necessitating more administrative burden for every sector. This is driven by the payers who make bank but drive up costs.

Waste now occurs at every level. The complexity, layering, bureaucratic burdening and various agendas create conflicting objectives which fuel delays and denials and foster waste. The system is asking for an administrative burden that pushes up costs.

Health Insurance Companies/payers are a big reason why health care is so expensive and they are an industry that actually did very well from the Coronavirus pandemic as elective surgeries were delayed, some of which will never be done:

4.    Hospitals:

The delivery of health care in the US is both complicated and expensive. Payers and pharma are probably the big players controlling pricing.

The Rise of the Administrative Sector- bureaucracy has meant that hospitals have many layers of managers, directors, vice-presidents and boards members, most of whom are rewarded well financially:

Larger hospital systems do better but the margins can be thin and many smaller ones close:

Hospitals as “Not-For-Profits” (NFP) get exemptions from local, state and federal taxes yet most NFP hospitals put only a portion of what they save back into the community with no accountability:

Whilst smaller community hospitals struggle, with many closing, larger health networks are very profitable and are thus able to expand further:

60% of U.S. hospitals are listed as NFP. This allows these hospitals to gain significant tax concessions in terms of local, county, state and federal taxes

Hospitals have been mandated to be transparent on pricing.  They have challenged this in the courts and failed. When hospitals send huge bills, payers often pay the bill sometimes discounted, sometimes the full bill. Consumers don’t get the luxury:

Revealing the chargemaster billing is now legislated but look at the penalties if they don’t comply.

“If a hospital were to be assessed the maximum penalty for an entire year, it would owe $109,500 for failing to comply.”

Try and find and navigate the chargemaster to work out what things cost:

There needs to be real transparency on pricing for procedures. If you can find it, the same procedure can cost wildly different amounts depending on where it gets done, independent of surgeon or anesthesia charges:

Hospitals margins are the best in decades (before COVID!):

In short, hospitals are a smaller piece  of why healthcare is so expensive.

5. The Government

The Government overseas health care and is it’s biggest client. More and more commercial payer are dependent on Medicare and Medicaid for it’s revenue.

The government has the power to legislate and intervene but rarely does in a meaningful way. Pharma, hospitals and payers have the most money spent on lobbyists and the amounts spent are staggering:

Physicians have weak lobbyists compared to pharma and payers:

The group of three, hospitals, payers and pharma do not want change:

Federal law prohibits the Federal Government from negotiating drug prices with a non-intereference clause in The Medicare Modernization Act of 2003 (MMA) which stipulates that the HHS Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.” In effect, this provision means that the government can have no direct role in negotiating or setting drug prices in Medicare Part D. Note that the VA system has managed to get better drug pricing:

6. Big Tech- The Future

Health care is big business. As we pointed out in Part One, If U.S. Health Care was a country, it would be the 5th largest country in the world, bigger than the Gross Domestic Products (GDPs) of over 188 countries. There is money to be made and middle America is a like an ATM for some.

Big Tech is Coming: Is it any surprise that Apple and Google want to enter health care given the potential profits? The target will be our health records, health data and our genetic data.

All 3 companies see profits to be made. Access to data is their goal. The complexity of US health care delivery is such that patient data from it’s entry is transferred and traded in many ways:

Our data is valuable and is not as secure as we think.

A lot of it is already being bought and sold. Right now the gains to us are not clear.

One thing we learned from the Coronavirus pandemic is that big tech is not our savior as it was next to useless as millions became infected and things ground to a halt.

Silicon valley may improve our electronic medical record but probably will do little else.

6. Conclusion

Health care in the U.S. is a big, big business. Hospitals, payers, physicians do well. Payers do really well. Hospital systems are doing very well while smaller hospitals fold despite COVID. Payers are doing exceedingly well (did I already say that?). Pharma does very well. Pharma, payers and hospitals have the best lobbyists and spend the most in Washington. They don’t want things to change. Why would they? Physician real and effective salaries have declined. They have poor lobbyists and are the last unabashed advocate for patients. Nurses are in the same boat, best exemplified by the risks not balanced by rewards in the Coronavirus pandemic. Too many health care workers gave their lives as the corporate entities kept moving on. Health care in America puts profits before people. The article below was written before the pandemic and things only got worse:

Why is the U.S. Health Care system so expensive? One word. Greed. The greed of corporate America. I’m looking at you- Blue Cross, United Health Care, Pfizer, Johnson and Johnson and the “not-for-profit’ health systems and probably soon Apple, Amazon and Google.