In Part 1, we identified the problems that Obamacare should have tried to fix. The list was long: Open-ended reimbursement for patented pharmaceuticals, regardless of price. Excessive use of medical treatments. Providers’ conflicts of interest. The routine delivery of ineffective and unproven treatments. Games that providers play to maximize their revenues. Charges that bear no relation to costs. Surprise bills and other out-of-network rip-offs. Widespread quality problems tied to dysfunctional business models. Political corruption. And an ocean of fraud.
Part 2 explains why Obamacare failed to fix these problems and describes what we should do instead. Although Obamacare’s proponents claimed to have drawn upon every good idea that experts had to reduce health care spending, the program didn’t try to address any of the problems described in Part 1. It imposed no limits on drug prices, on the use of unproven medical treatments, or on surprise medical bills. It did almost nothing about fraud. In fact, Obamacare really did just one thing: it expanded access to politically controlled third-party payment arrangements—private insurance and Medicaid—and made them more comprehensive. It should have been obvious to everyone that these changes, which brought millions of new people and billions of new dollars into the system, would cause spending to rise. If the object was to bend the cost curve downward, Obamacare was designed to fail.
From a fiscal perspective, the coverage-expanding component of Obamacare was rotten to the core. As Chapter 15 explains, the health care cost crisis is driven by third-party payment and always has been. Here’s how it works, in seven easy steps:
This vicious cycle continued until the first decade of the 21st century, when private health care coverage became so expensive that millions of people could no longer afford it. Then the Great Recession hit, cost millions of people their jobs and their insurance, and demand was depressed even further. For a while, it seemed that health care spending would moderate on its own.
Obamacare got the vicious cycle going again. By requiring people to carry comprehensive insurance coverage, subsidizing premiums, and expanding Medicaid enormously, it reignited the fire. That’s why, if the program remains intact and is funded as it was in the past, national health expenditures are projected to grow by 5.6 percent per year over the next decade and to consume 20 percent of the GDP by 2025.1
Whether Obamacare will remain in place and be funded is, of course, what everyone wants to know. As we noted in the Introduction, Republicans control both houses of Congress and the White House, have attacked Obamacare repeatedly, and have repealed the penalties on those who don’t purchase insurance. Even Democrats, who want to preserve Obamacare, acknowledge that the program has significant flaws that need to be fixed.
The question is, then, squarely raised: What should come after Obamacare? Chapter 16 considers the leading proposals offered by both the left and the right and finds them wanting. The list includes more tax preferences for more people and single payer/“Medicare for All.” None of these reforms would do anything to fix the problems we identified in Part 1. To the contrary, all are likely to make some of them worse. If and when Americans get serious about controlling health care costs, they will eliminate tax preferences that drive up aggregate demand by making medical services seem cheap. They will also stop hoping that the government will fix problems instead of creating them.
Chapter 17 identifies reforms with real potential to make American health care cheaper and better. We begin with reforms that consumers can implement on their own. As more and more people purchase policies with high deductibles or are priced out of the insurance market entirely, millions of consumers will have to buy health care directly. Many of these people will go looking for deals. They will turn to retail health care outlets that are convenient, effective, and affordable. As demand increases, retailers will be happy to expand. Initially, they will displace old-style providers as fully as the law allows. Then, they will exert pressure on legislators to loosen the constraints. They will win political battles here and there, and as they do, the case for protecting incumbent providers from competition will crumble and collapse.
Norms will change too. As consumers grow accustomed to buying health care directly, they will increasingly wonder why they ever frequented old-style providers or used insurance to pay them. When it feels natural to go to Walmart or Costco for health checkups, blood tests, eye exams, inoculations, and other medical procedures, the game will be over. Eventually, we predict, the retail health care sector will integrate vertically, and companies like CVS Health and Costco will start running hospitals, nursing homes, and assisted living facilities. Then price, quality, and access to medical services of all types will vastly improve.
Chapter 18 explains that, in the meantime, consumers can save money by breaking local cartels. The hospital near you won’t offer a competitive price for the surgery you want because the people who run it think they have a lock on your business. You can show them that they’re wrong by having your procedure performed at a world-class hospital or surgery center in India, Mexico, Singapore, South Korea, or Europe. By doing so, you’ll cut the price in half and enjoy a nice vacation, even after accounting for the cost of airfare. If you don’t want to go abroad, you can also get a good deal by traveling domestically. Just call up the Surgery Center of Oklahoma and they will quote you a package price for a joint replacement that will save you thousands. Or give WeightLossAgents.com a buzz and they will give you a bargain price for gastric sleeve surgery in Miami.
And here’s the really good news. You may not have to travel at all. Just tell the folks at your local hospital that you need to save money and have decided to have your surgery elsewhere. They may suddenly see a need to compete and drop their price.
What about pharmaceuticals? We need to provide incentives for drug companies to innovate and develop new treatments. But we don’t have to pay them whatever they ask. That’s an invitation to get taken. We need a new deal for pharmaceuticals, and fortunately there is one. Chapter 19 explains how prizes can generate innovations without the marketing exclusivity and high prices that come with patents. Chapter 19 also shows how we should address the problem of price spikes for generic drugs.
What about fraud and abuse? All human systems depend on minimum standards of integrity and fair dealing—and must also detect and punish those that misbehave. For too long, we have allowed criminals and con artists to loot the health care system. As Chapter 20 explains, we need to raise the costs of bad behavior by making greater use of whistleblowers. We must also enlist consumers in the battle against fraud, by switching to first-party payment in most contexts and by routing dollars through consumers when costs are borne by insurers or taxpayers.
Of course, there will always be a role for health insurance. As we discuss in Chapter 21, we expect almost everyone will want coverage against catastrophes. Policies that cover only catastrophes are much cheaper than the soup-to-nuts policies that Obamacare forced everyone to buy. More people will be able to buy such insurance, especially after widespread direct purchasing of routine medical treatments exerts strong pressure on providers to charge less.
That said, it is inevitable that some people will be too poor to buy what they need. If we want to help the poor, the first thing we should do is shift to direct purchasing arrangements that have significant power to make health care cheaper. As Chapter 22 explains, lower prices help poor people the most because they are the most price-sensitive consumers. We should also encourage poor people to save what they can and supplement their ability to buy what they need by giving them cash or restricted vouchers. Finally, we should maintain a thin safety net for people who fall through the cracks, but we should require everyone, including the very poorest, to pay for some of the benefits they receive. People tend to undervalue and overuse things that are free.