How Zigzagging Is Undermining U.S. Healthcare

U.S. healthcare is in financial crisis, and patients are feeling it acutely. Nearly 90 million (more than 1 in 4) Americans are enrolled in Medicaid, the public health insurance program for people with low income. Medical bills are a leading cause of bankruptcy as 100 million Americans remain saddled with medical debt. All of this in a nation that spends 18% of its GDP on healthcare, nearly twice as much money per citizen as any other country—while achieving the worst health outcomes among 12 of its richest peers.

Thinking about this frustrating lack of healthcare progress, I’m reminded of the day I left college in Boston to begin medical school in New Haven.

Two friends helped me hitch a U-Haul trailer to my car and load my things. When it was time to exit the crowded parking lot, I could see the only way was by backing out. So, I checked the rearview mirror, shifted gear into reverse and turned the wheel to the right. The U-Haul zigged left. Then I turned the wheel to the left. The trailer zagged right.

In today’s healthcare system, hospital administrators, pharmaceutical CEOs and physicians are similarly focused on the rearview mirror, zigging and zagging, and failing to make forward progress. The difference between their circumstance and mine is that they choose to zig and zag. Here are three ways their actions hurt patients:

1. Hospitals fail to make care more efficient

On January 1, 2021, the Hospital Price Transparency Rule went into effect. The law requires hospitals to make public a consumer-friendly list of prices they charge for items and services.

Congress’ intent was to demystify hospital pricing, making it possible for patients to know how much they’ll pay for an inpatient stay or a routine procedure before choosing a hospital.

Two years after the rule took effect, however, patient advocacy groups report that only 1 in 4 hospitals are fully compliant.

Hospital industry leaders insist that it’s too difficult and expensive to make pricing information easily accessible to the public. The reality is different. Hospital administrators simply don’t want the public to see how hospital pricing works.

That’s because hospitals raise or lower prices based on who’s paying—sometimes by a factor of five. Uninsured patients receive the highest bills whereas public payers like Medicare write checks for a fraction of that amount.

Healthcare charges weren’t always so convoluted. For most of the 20th century, hospitals aligned their rates with the actual cost of providing care. Private insurers paid similar rates as government-funded programs.

But in 1997, the Balanced Budget Act changed the math for all payers. In an effort to lower healthcare spending, the government slashed Medicare payments for doctors and hospitals—hoping hospitals would take the opportunity to increase efficiency of care through innovative measures.

That’s not what happened. Instead, hospital leaders started zigzagging.

To offset lost revenue from Medicare, hospital leaders raise prices disproportionally more each year for employers. As a result, private insurers now pay twice as much as the government does for identical procedures (zig).

As business began to shoulder more of the financial burden, corporate leaders transferred the excessive costs of care to their workforce through high deductible health plans. Today, more than half of American workers are enrolled in a plan that often requires their families to pay $5,000 a year before their health insurance kicks in (zag).

To lower prices, employers and private insurers are now threatening to exclude expensive hospitals from their coverage networks. In response, inpatient facilities are holding prices stable, but adding new “facility charges” to patient bills for every service provided (laboratory test, radiological procedure, etc.).

None of this constitutes innovation or forward progress. It’s just zigzagging.

2. Pharmaceutical companies keep raising prices

Drug prices in the United States have risen 35% since 2014, making pharmaceuticals fastest-rising healthcare sector over the last 10 years (with rate increases even higher than hospitals).

Last August, President Biden signed into law the Inflation Reduction Act, which for the first time will allow Medicare to institute a “fair price maximum” for drug companies. However, the law won’t start until 2026 and will only cover 10 Part D medications in the first year. And even with such modest checks on the drug industry, Big Pharma is fighting back with tens of millions of dollars earmarked for lobbying, campaign contributions and legal challenges. Already, drug companies are raising prices on hundreds of medications to offset potential future reductions.

Historically, U.S. pharmaceutical companies invested heavily in research and development (R&D), leading to the creation of many highly effective medications. These wonder drugs helped patients fight infections, prevent heart attacks, treat cancer and reduce the risk of a stroke. But by the 21st century, Congress passed several laws that benefited the drug giants: extending the length of patent protections, allowing direct-to-consumer drug advertising, and keeping generic medications and competing drug companies at bay.

That’s when the zigzagging began. As drug costs soared, insurers hired pharmacy benefit managers (PBMs) to negotiate lower prices directly from drug manufacturers and figure out alternatives to many of the costliest medications. In response, manufacturers issued rebates to PBMs, who then pocketed the money and, in return, included many excessively priced drugs on formularies (even when there were less expensive options for insurers and patients).

As costs continued to climb, insurers forced patients to pay more out-of-pocket in an effort to get them to make less expensive choices. Drug companies responded by giving patients coupons to fund the out-of-pocket costs. Insurers then refused to credit patient’s deductibles when they used a drug-company coupon.

As a result of all this zigzagging, more and more Americans must choose whether to compromise their health or face financial destruction.

3. Doctor visits becoming unaffordable

For patients, it’s incredibly confusing and time consuming to figure out whether a diagnostic test or treatment will be covered by insurance and for how much. It hasn’t always been this way. For most of the 20th century, patients saw their physicians in-person, received care and paid a modest portion of the doctor’s bill (usually 20%).

For decades, that approach to reimbursement worked. But as complicated new treatments were introduced, physicians began charging higher and higher prices. To limit healthcare inflation, a series of zigzagging maneuvers began.

First, insurers put in place rigid prior authorization requirements. In response, doctors refused to contract with insurers, generating surprise bills and threatening to send collection agencies to people’s homes when they didn’t pay.

In response, the government stepped in, forcing the two entities to settle pricing disputes through arbitration. To make up for lost revenue, primary care doctors began charging patients “concierge fees” to use their services. And specialists signed up with private equity firms to force insurers to pay higher rates for procedures.

Curing the high cost of healthcare

Zigzagging not only has prevented progress in healthcare delivery, but it also has allowed medical costs to rise rapidly. The United States now spends $12,914 per American each year, which translates to $20,000 and $30,00 per family—one-third of average household income ($70,784).

If industry leaders were willing to drive forward rather than staring stubbornly in the rearview mirror, they could make medical care better and more affordable.

To lower costs and raise quality:

• Hospitals could implement more efficient approaches to inpatient care delivery, eliminate delays in treatment across weekends and reduce the number of hospital beds nationally by a third. As part of the process, they would move numerous services to outpatient sites where in-and-out treatments lead equal or better outcomes at lower costs. And they would close smaller hospitals that lack sufficient patient volume to deliver high quality, cost effective medical treatment.
• The U.S. could follow the lead of most European nations when it comes to pricing medications. In France, Germany, England and elsewhere, governments negotiate prescription drug prices on behalf of patients based on drug efficacy and R&D costs. The government could force pharmaceutical companies to price medications similar to other industrialized nations to ensure patients can afford necessary drugs.
• Doctors could join together, replacing the current fee-for-service payment methodology with “capitation” at the delivery-system level (an annual fee paid to groups of doctors and hospitals to care for the medical needs of a specific population of individuals for the upcoming year). Capitations rewards value of care (prevention of medical problems and superior clinical outcomes) not volume (of tests, treatments and services). This shift would incentivize providers to find innovative ways to treat patients, maximize patient safety and avoid medical problems from happening in the first place.

Instead of driving forward with these types of improvements, each part of the healthcare industry prefers to zig and zag, stalling progress, frustrating patients and harming our nation’s health.