Prescriptions for the U.S.

Health Care System

HEALTH CARE POLICY PAPER
AUGUST 2014

THE PROBLEM
Americas health care system is badly broken. Although the United States is one of the wealthiest
developed countries in the world, we are also one of the least healthy. There is an alarming
disconnect between health care spending and health outcomes.
In 2011, the U.S. spent $8,508 on health care per capita, which is two and a half times more than
the Organization for Economic Co-operation and Development (OECD) average of $3,339.1 Yet,
compared to the average OECD country, Americans lose three times as many years of life to
infectious diseases and twice as many years of life to metabolic diseases.2 The average lifespan of
Americans is below that of 17 other industrialized countries, and Americans fare worse in several
measures including obesity, diabetes, heart disease, and chronic lung disease.3

In short, the United States is paying above average prices for below average results, with far
reaching consequences for our quality of life and economic well-being. The problems with our
health care system can be boiled down to three separate yet interrelated categories: cost, quality,
and access.

OECD. 2013. OECD Health Data 2013. How Does the United States Compare?
Kliff, Sarah. January 7, 2014. The Washington Post. Think America has the worlds best health care system? You wont after seeing this chart.
3
Miller Center. University of Virginia. State Health Care Cost Containment Commission. January 2014. Cracking the Code on Health Care Costs.
2

1. Cost
The amount of money our country spends on health care is increasing as more people are using
more services that are growing more expensive. Our aging population, our fee-for-service health
care delivery system and technological advancements primarily drive these increasing costs.
Overall, the United States spends 18% of GDP on health care, more than triple the relative amount
we spent just thirty years ago. Over the past 40 years, health care spending has grown at an
alarming rate. In 1965, national health care spending was $187 billion (2005 dollars), by 1985 it
was $666 billion, and in 2005 it reached about $1.9 trillion.4
Costs also vary widely within the United States. For example, the average hospital stay in the U.S.
is just under $4,300, but one in four patients are charged $1,514 or less while one in 20 pay
$12,537 or more.5 Whats worse, a 2012 report from the Institute of Medicine found that 30% of
health care spending in 2009 was wasted on unnecessary or poorly delivered services, which
amounts to about $750 billion of waste.6
As health care costs continue to rise and outpace economic growth, individuals, businesses and
government will experience the consequences of lower levels of disposable income, decreased
competitiveness and higher federal deficits and debt, respectively.
In particular, the Congressional Budget Office (CBO) warns that health care costs pose one of the
greatest threats to the long-term financial solvency of the federal government. Currently, federal
spending on health care is almost $900 billion annually, but is expected to grow to $1.7 trillion
over the next 10 years.7 In other words, health care spending is the single largest contributor to our
national debt, aside from interest payments.

CBO. January 2008. Technological Change and the Growth of Health Care Spending.
Meyer, Richard. January 29, 2014. WorldofDTCMarketing.com. American Healthcare Costs are Completely Out of Line With the Rest of the
Modern World.
6
Institute of Medicine. September 6, 2012. Best Care at Lower Cost: The Path to Continuously Learning Health Care in America.
7
CBO. April 2014. Updated Budget Projections 2014 to 2024: Long-Term Budget Outlook.
5

2. Quality
Americas health care system delivers below average outcomes in spite of, and sometimes as a
result of, high health care spending due to unnecessary, uncoordinated and unplanned care.
First, cultural preferences and financial incentives lead to more care being delivered than is
necessary. Most providers are rewarded for quantity rather than quality of care. More care leads to
more opportunities to inflict more harm to patients in the process. At least 18 studies have found a
relationship between higher spending and decreased quality. For example, the Inspector General of
the Department of Health and Human Services released findings in May 2014 that one-third of
patients in skilled nursing facilities were harmed during their stay, 60% of whom had to be
readmitted to the hospital.8
Second, there is a fragmentation of health care delivery between providers. There are, as the old
saying goes, too many cooks in the kitchen. Rather than unified decision-making working
towards an overall health outcome, our current system has multiple decision makers that are only
responsible for a partial set of health care decisions. This lack of coordination means that ultimate
responsibility usually falls on the patient to attempt to coordinate physicians or specialists, which
is difficult since few patients have extensive medical knowledge.
Third, our health care system is better described as a sick care system because it is focused on
treating problems as they arise. This is in part due to a fee-for-service model that doesnt prioritize
comprehensive, long-term, and preventive care over acute care. Focusing on preventive care
would reduce long-term health care costs because the cost of future treatments would rarely
become a reality. The Surgeon General lists examples of potential cost savings with preventive
care9:

A 5% reduction in the prevalence of hypertension would save $25 billion in 5 years;

A 1% reduction in weight, blood pressure, glucose, and cholesterol risk factors would save
$3.7 billion annually in medical costs per person;
Tobacco screening is estimated to result in lifetime savings of $9,800 per person.

3. Access
Lack of health insurance is the primary reason why many Americans do not have adequate access
to health care. As of April 2014, the uninsured rate of low-income Americans (25%) was twice
that of all Americans (13%), according to Gallup. The high rate of Americans without health
insurance is a problem on an individual and community level.
On an individual level, those who are uninsured are at risk of financial hazard if they need care,
less likely to access preventive care, and more likely to die in the hospital than those with
insurance. As the Kaiser Foundation reported, Uninsured adults are almost twice as likely to
report being in fair or poor health as those with private insurance.10 The safety net of public
hospitals and community clinics that serve the uninsured population falls woefully short of
meeting demand.

8

Office of Inspector General Department of Health and Human Services. February 2014. Adverse Events in Skilled Nursing Facilities: National
Incidence Among Medicare Beneficiaries.
9
Surgeon General. June 16, 2011. National Prevention Strategy Appendix 1: Economic Benefits of Preventing Disease.
10
The Henry J. Kaiser Family Foundation. Oct. 2013. The Uninsured: A Primer Key Facts about Health Insurance on the Eve of Health Reform.

On a community level, three-quarters of uncompensated care for the uninsured population is

covered by local, state and federal funds or about $42.9 billion in 2008.11 These are costs passed
to the rest of the population through higher taxes, insurance premiums, and provider expenses.
The Affordable Care Act (ACA), although flawed in many ways, is leading to more Americans
gaining health insurance coverage by enacting an individual mandate, providing government
subsidies, and providing funds for states to expand Medicaid. However, in states that have not
opted to expand Medicaid, there are nearly five million poor uninsured adults who have incomes
above Medicaid eligibility levels, but below ACA-support levels meaning they may fall into a
coverage gap of earning too much to qualify for Medicaid, but not enough to quality for tax
credits.
However, the ACA has also led to millions of Americans losing their health insurance coverage,
primarily because their individual plans did not meet the standards of the law; credible figures
range from 2.6 million to 4.7 million people. Many of these individuals will not qualify for the
subsidies offered through the law and may not be able to afford coverage.12
Access doesnt only pertain to obtaining health care insurance, but also general access to quality
health care. Even those with coverage might have difficulty finding a quality medical office or live
in a rural location with a high travel time to the nearest hospital.

11

The Henry J. Kaiser Family Foundation. Oct. 2013. The Uninsured: A Primer Key Facts about Health Insurance on the Eve of Health Reform.
Clemans-Cope, Lisa & Nathaniel Anderson. Health Affairs Blog. March 3, 2014. How Many Nongroup Policies Were Canceled? Estimates
from December 2013.

12

NICKS PLAN
Government intervention in the free market can often do more harm than good, and historically,
the health care market has been no exception. Ultimately, if Americas health care system changes
for the better, it will be through innovations from providers and insurers, as well as individuals
taking responsibility for their own health and wellness.
However, it would be irresponsible and negligent of the federal government to treat Americas
broken health care system as entirely the free markets problem to fix. A few structural
inefficiencies, such as adverse selection among the insured and asymmetric information between
providers and patients, cannot be remedied without government involvement. Further, the federal
governments historic and important role in assisting the poor and the elderly access health care
means that its decisions have a significant impact on how Americas health care system is
structured and operates.
The plan below responds to the harm that poorly designed laws have caused in our complex
system of health care, as well as the significant benefits that prudent and market-based federal
health care reforms can bring to millions Americans, especially those who are sick or uninsured.
1. Repair the Affordable Care Act
In retrospect, our government should not have created a new health care entitlement by passing the
Affordable Care Act (ACA) without at least first fixing existing health programs, including
Medicaid and Medicare, which remain fiscally unsustainable. The ACA was passed in a highly
partisan manner and ignored many of the legitimate concerns and ideas of both policymakers and
the American people. Further, the law has been implemented in an incompetent way and has
proven to be more costly and more disruptive to those who were already insured than was
originally advertised.
Nevertheless, the ACA remains the law of the land; at this stage, outright repealing the law is not
only politically impractical, but it would also be fiscally irresponsible, as doing so would add $109
billion to the federal deficit over the next decade.13
Thus, Congress must set about overhauling the ACA by (i) acknowledging where it has already
improved our health care system and (ii) focusing on where additional reforms should be enacted
to increase choice, contain costs, and improve the financing of the law within the confines of an
appropriate, affordable and sustainable role of government.
The ACA is, on one hand, taking steps to improve our health care system by making important
changes to the insurance industry, including by prohibiting companies from discriminating against
those with pre-existing conditions and by extending coverage to uninsured individuals through the
insurance exchanges and optional state-based Medicaid expansion.
On the other hand, the ACA has caused too many people to lose the insurance coverage they
otherwise were satisfied with, is failing to contain health care inflation to the extent necessary, and
will likely cost taxpayers much more than anticipated.

13

CBO. July 24, 2012. Letter to the Honorable John Boehner providing an estimate for H.R. 6079, the Repeal of Obamacare Act.

Specifically, Congress should repair the ACA to:

Increase choice and competition by:

o Replacing the individual and employer mandates with market-based incentives for
people and companies to obtain health insurance, such as allowing insurance
companies to charge higher premiums to those who have not maintained
continuous coverage;
o Extending a grandfather clause to all plans that existed before the ACA for only
those people covered by those plans, so that no individual is forced by the
government to lose the coverage or care he or she enjoyed;
o Adding an option in exchange plans that would allow consumers to pocket, in a
health savings account, a portion of the difference between their premium and
health expenditures, thereby incentivizing healthier lifestyles and disincentivizing
unnecessary care;

Contain costs and expenditures by:

o Focusing subsidies on coverage that guarantees basic preventive, wellness and
catastrophic care but tapering off beyond this coverage;
o Limiting subsidies only to those who make up to 300% of the poverty level (down
from the current 400% level)

Improve the financing of the law by:

o Replacing the tax on so-called Cadillac insurance plans with a revenue-neutral
limit on the tax exclusion for employer-provided health care, which would have
many positive added advantages, including driving down overall costs;
o Widening the age differential in insurance pricing between younger and older
Americans from 3:1 to 5:1 to limit the intergenerational redistribution of costs and
to increase the likelihood of affordable coverage for younger Americans;

Other:
o Extending federal subsidies for health insurance available through the law to those
who fall within the coverage gap in states that have chosen not to participate in
the Medicaid expansion

2. Strengthen Medicare & Medicaid

Medicare and Medicaid are vitally important programs that extend health care to the most
vulnerable populations of our society, including the elderly, disabled and poor. Yet these programs
remain on unsound fiscal footing and are unsustainable for the next generation. Together,
Medicare and Medicaid are the largest non-interest drivers of federal spending and debt. Without
reform, they will continue to crowd out other important parts of the federal budget and drastically
increase our national debt.

Within Medicare alone, costs are expected to rise 60% over the next decade to $848 billion in
2024, or 15% of total federal outlays.14 The Medicare Trustees estimate that the Medicare Part A
Hospital Insurance Trust Fund will run empty by 2026, at which point the program will only be
able to pay out as much as is collected in revenue.15

Contrary to popular belief, the benefits extended through the program have not been fully paid for
by beneficiaries: indeed, the average wage earning couple in 2010 can expect to receive $387,000
in lifetime Medicare benefits, more than three times the amount of Medicare taxes and premiums
they paid in.16

14

CBO. April 2014. Updated Budget Projections 2014 to 2024: Long-Term Budget Outlook.
The Board of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. July 28, 2014. 2014 Annual
Medicare Trustees Report.
16
Urban Institute. 2012. Social Security and Medicare Taxes and Benefits over a Lifetime: 2012 Update.
15

Most of the cost growth in Medicare, equivalent to 1.9% of GDP, is a result of an aging
population; Medicares beneficiary population will grow from just over 50 million Americans
today to 80 million people by 2030. The remaining cost growth, equivalent to 0.7% of GDP, is a
result of general health care inflation.17 That means reforming the delivery system to reduce
expenditures and slow cost growth are necessary but not sufficient; there must also be adjustments
to actual benefits and revenue, including increasing the responsibility for costs that beneficiaries
incur.
Some policymakers, including Rep. Tom Marino, have supported transitioning Medicare into a
defined contribution system that would offer beneficiaries a voucher to purchase insurance on the
private market. This system, however, would merely shift rising costs to seniors who may not be
able to afford them and lessen our countrys ability to leverage Medicares current market power
to push through systemic health reforms.
Instead, Congress should reform Medicare to:

Reward value over volume by:

o Replacing the Sustainable Growth Rate (SGR), which determines Medicare
physician payments, with a more realistic formula;
This formula should encourage risk-based contracting by (i) making up to
5% of reimbursement payments, on a voluntary basis, contingent on
providers demonstrably improving patient outcomes and (ii) gradually
reducing the growth of Medicare payments through the traditional fee-forservice model.
This would prevent the continuous doc-fix scenario that has occurred for
more than 15 years, in which Congress routinely passes a short-term fix to
prevent draconian cuts to Medicare doctors salaries.
o Increasing hospital readmission penalties, with exceptions for safety net providers,
and penalties for high-rates of avoidable mistakes during care

Improve coordination by:

o Adding a new option of Medicare Networks to traditional Medicare and
Medicare Advantage that would serve as improved versions of todays Accountable
Care Organizations and provide both beneficiary and provider incentives to join;
Medicare Networks can reduce waste, improve outcomes and cut costs
because they encourage hospitals and physicians to coordinate their care
and share in any cost savings gained while improving health outcomes. A
full proposal has been offered by the Bipartisan Policy Center (A
Bipartisan Rx for Patient-Centered Care and System-Wide Cost
Containment).
o Expanding bundled payments for episodic care, whereby providers are reimbursed
a fix amount for a combination of acute, post-acute and physician services

Enhance competition by:

o Allowing competitive bidding for durable medical equipment (DME) and other
services;

17

Gordon, Joshua. The Concord Coalition. Feb. 27, 2013. The Federal Budgets Health Care Problem Isnt Quite What Everyone Thinks It Is.

o Allowing competition for generic prescription drugs in the Low-Income Subsidy

program.

Increase financial solvency and sustainability by:

o Creating a unified deductible, coinsurance rate, and catastrophic cap for Medicare
Parts A and B;
For example, the Simpson/Bowles Plan proposed a $550 deductible, a 20%
coinsurance rate on all services, and a 5% catastrophic coinsurance after
$5,500 per year of out-of-pocket expenses, up to a $7,500 hard limit.
Savings were estimated to be $110 billion over a decade.
o Increasing the number of wealthier beneficiaries who pay income-related premiums
in Medicare Parts B and D, while using a portion of savings to increase low-income
support by expanding cost-sharing assistance;
For example, the Bipartisan Policy Center proposed gradually higher
premiums would begin at $60,000/individual rather than
$85,000/individual; premium brackets themselves would not increase.
Savings were estimated to be $66 billion over a decade.
o Eliminating first-dollar coverage through Medigap plans and limiting coverage of
other cost-sharing (which would also lower Part B premiums for all beneficiaries);
o Extend the Medicaid drug rebate to those eligible for both Medicare and Medicaid,
who receive drug coverage through Medicare Part D.

Medicaid:
The federal government should replace its open-ended Medicaid commitment to the states with a
fixed-growth grant (GDP + 1%) that varies based on each states low-income population. In doing
so, the federal government would allow states greater flexibility in how they meet the needs of
their low-income populations through the Medicaid program. One such plan, offered by Rep. Paul
Ryan and former CBO Director Alice Rivlin, would save $180 billion over the next decade.18
Doing so would incentivize states to innovate new ways to better serve both Medicaid
beneficiaries and taxpayers in general.

3. Other Health Reforms

Insurance Portability
Government should not stand in the way of individuals who wish to purchase insurance over state
lines. Doing so would provide greater choice between plans and lower prices due to increased
competition. In setting up insurance health care compacts the federal government would have to
ensure basic consumer protections that now vary state to state. Variations in state laws and
regulations means that consumers may be able to buy less expensive policies elsewhere, usually
those with less stringent mandates. A 2008 publication estimated that if individuals in New Jersey
could buy health insurance in a national market, 49% more New Jerseyans in the individual and
small-group market would have coverage.19

18
19

CBO. April 5, 2011. Letter to the Honorable Paul Ryan providing a long-term analysis of a budget proposal by Chairman Ryan.
Parente et. al. 2008. University of Minnesota. Consumer Response to a National Marketplace in Individual Insurance.

Tort Reform
Many medical professionals practice defensive medicine by performing numerous, and sometimes
unnecessary, medical procedures to prevent malpractice lawsuits. Tort reform would create a drop
in medical malpractice insurance premiums, especially if non-economic damages are capped at
$250,000. Other elements of tort reform in the health insurance industry are capping attorneys
fees, shortening the statute of limitations for actions, allowing periodic payments, and allowing
binding arbitration.
Pharmaceutical Regulations Reform
Reforming the pharmaceutical industry would also reduce health care costs. First, it is illegal to
import prescription medicines from abroad, even personal purchases from mail-order pharmacies.
Allowing Americans to purchase prescription medicines from abroad would reduce personal
health care costs because prescription drugs are much less expensive in other countries. For
example, Pulmicort, an inhaler, costs $175 in the U.S., but only $20 in Britain and the nasal spray
Rhinocort Aqua can cost upwards of $250 without insurance/has an $80 copayment with insurance,
but in Europe only costs $7.20
Second, a scheme called pay for delay exists, in which some pharmaceutical companies pay
generic drug makers not to produce competitors for prescription drugs. These companies would
rather defend their share of the pie than let a drug be produced at a more affordable rate, which
would enable more individuals to have access to these drugs. Implementing laws that prohibit
pay for delay would ensure lower personal health care costs.
Encouraging Wellness
If individuals take personal responsibility for their health and wellness, our whole health care
system will see a reduction of long-term health care costs. Regular exercise and proper nutrition
can be likened to regular oil changes for a vehicle; simple maintenance goes a long way. Beyond a
mass cultural shift towards making healthy choices, workplaces can play a large role in
encouraging health promotion.
As the nations largest employer, the federal government can become the model for employee
wellness incentivizing insurance programs. Organizations can implement programs that focus on
health education, support active physical environments, and/or provide health screenings. Specific
examples include subsidizing memberships to fitness centers, supplying healthy food options,
creating incentives for employees to walk or bike to work, and providing some on-site health
services. The federal government can also play a role by allowing greater regulatory flexibility for
insurance companies that use more creative methods to promote personal wellness, such as a fee
rebate for members of an organization 5K-race team. Not only will these programs result in future
savings through lower health care costs, but also higher productivity.21

20

Rosenthal, Elisabeth. October 12, 2013. The New York Times. The Soaring Cost of a Simple Breath.
Goetzel, et. al. March 5, 2013. Cost Savings Analysis Supplement: Return on Investment (ROI) Model for Increasing Investment for Worksite
Health Promotion Programs in the Non-federal and Federal Sectors.

21