Tackle affordability through competition or it will come through government control
The conversation about healthcare policy today is rightly focused on mitigating the COVID-19 pandemic, and ensuring that American hospitals avoid the fate of Italy’s. But while we do that, we cannot completely forget about the other, more familiar crisis in U.S. healthcare: affordability.
As I write this, Congress is considering a $1 trillion aid package to help families endure the economic disruption that has accompanied social distancing. But taxpayers and patients spend nearly $4 trillion each year on healthcare, with no end in sight to rising prices and costs.
Take inpatient care. Medicare and Medicaid have managed to keep hospital spending in check; those programs’ payments to hospitals have grown in line with consumer inflation. By contrast, employers sponsoring private insurance have taken it on the chin; a recent study from the RAND Corp. found that employers on average pay 2.4 times what Medicare pays for a typical inpatient episode.
Sen. Bernie Sanders (I-Vt.) says we should abolish private insurance altogether and replace it with Medicare for All—and most importantly, Medicare’s fee-for-service prices. Joe Biden says we should have a “public option” that competes with private insurers by offering— once again—Medicare’s prices.
But there is a third alternative to the status quo: what we might call Medicare Advantage for All.
Medicare Advantage is increasingly popular with seniors; nearly 40% of all Medicare beneficiaries are enrolled in it. One of the key reasons Medicare Advantage works, unlike employer-based coverage, is that hospitals outside of the MA networks negotiated by private parties cannot charge more than Medicare fee-for-service rates. By contrast, in the employer-sponsored market, regional hospital giants are deploying their monopoly power to force employers to accept higher and higher prices, making inpatient care less affordable every year.
In a new paper published by my think tank, the Foundation for Research on Equal Opportunity, we propose several measures for restoring competition to consolidated hospital markets. The most important would apply local market Medicare Advantage rates to all payers in highly concentrated urban markets. Hospitals that voluntarily divest enough of their facilities to restore a competitive environment would be free of this Medicare Advantage price ceiling.
Instead of the one-size-fits-all approaches taken by advocates of single-payer and public option healthcare, Medicare Advantage for All would create a powerful incentive for hospitals to restore competition where it is currently absent. Call it “auto-antitrust.” Hospital systems that prefer to remain consolidated, and believe they can succeed at Medicare Advantage rates, would be free to do so. Under our proposal, rural hospitals would be exempt from this structure. Indeed, we propose increasing Medicare’s critical-access hospital formula from 101% of reasonable costs to 110%, so as to strengthen the ability of rural facilities to stand on their own two feet, without being swallowed into giant regional systems.
Hospital leaders often claim that there is little they can do to bend the cost curve. But we all know there are bad actors who take advantage of their monopoly position to charge high prices not because they have to, but because they can.
Other hospital executives claim they can’t survive on rates close to Medicare Advantage’s. But this makes no sense. By the standards of the rest of the world, Medicare Advantage’s prices are quite generous, especially when one considers that the median length of stay in a U.S. hospital is several days shorter than that of our industrialized peers. For example, wealthy U.S. peers pay about $30,000 for coronary artery bypass surgery; MA plans pay more than $50,000.
Are there regulatory and legal barriers to reducing the cost of delivering hospital care? Most likely. But when I ask hospital CEOs to name those barriers, I get a lot of blank stares.
Today, the average family sends more of its income to the hospital industry than it does to the IRS. If hospitals are unwilling to reduce high prices through competition, the government will reduce high prices through control. Hospitals should choose the market.