Four policies can effectively tackle the affordability issue. First, we need to address drug prices. The United States has just over 4 percent of the world’s population, and yet it accounts for nearly half of global drug spending. On average, the United States spends $1,443 per person a year on drugs. This cannot be explained by utilization; the difference is the drug prices we pay.
Switzerland, home to two of the largest drug companies in the world, negotiates drug prices. It has the second-highest per capita drug spending, at about $940 annually. That $500 per person difference between the United States and Switzerland translates to $160 billion per year in potential savings. Even just a third of those savings, $53 billion, would represent a 10 percent reduction in drug prices.
Despite a lot of talk about cutting drug prices, the Trump administration has taken no substantive action. Democrats need to endorse national, not just Medicare, drug price negotiations that use a value-based pricing framework — linking drug prices to their health benefits in reducing mortality and morbidity — international comparisons and affordability for the average citizen. If the negotiations are not successful, then the government should unilaterally set maximum drug prices.
Second, hospital prices are soaring and must be contained. Medicare and Medicaid set their own hospital prices, which have risen modestly in recent years. But hospital prices for the roughly 160 million Americans with private insurance have shot up as much as drug prices. In 1996, hospitals charged private insurance companies about 6 percent more than Medicare. In 2012, they charged 75 percent more than Medicare. A recent RAND study indicates that, on average, hospitals now charge private insurance companies 141 percent more than Medicare.
The main culprit behind this price escalation appears to be the mergers of hospital systems, which creates local monopolies. Researchers at Yale calculate that capping prices for inpatient care for private insurers at 120 percent of Medicare would save about 20 percent of those costs, approximately $90 billion per year. That cap may be too aggressive, but a cap of 140 percent would save more than $30 billion.
Next, we need a policy that targets wasteful insurance billing practices. In 2010, the National Academy of Medicine estimated that about 14 percent of health care spending was related to billing and insurance-related administrative activities. Updating those numbers for today, the Center for American Progress estimates that we spend nearly $500 billion a year on billing and insurance processing. Based on comparisons with other countries, about half of that is classified as “excess” — a polite way of saying waste.
The simplest approach is to empower an independent commission to create a clearinghouse for processing all medical bills with uniform standardized electronic formats for all insurers. Both Germany and Japan — countries with hundreds and thousands of insurance companies — have such centralized bill processing systems, generating low billing costs. Health economists suggest this could yield savings that are more than 3 percent of expenditures, about $90 billion per year.
The fourth option is to push even harder on switching from fee-for-service payment to value-based alternatives. As it stands, when physicians avoid an unnecessary test or deliver the same outcomes for less money, they suffer financially. Capitation, bundles and global budgets make doctors and hospitals responsible for both the total cost of caring for patients and the quality of their outcomes. Ultimately, it is doctors who write orders and decide on a patients’ suite of tests and treatments.
These four simple policies can easily save more than $100 billion and, if pushed aggressively, maybe close to $200 billion per year. Americans and American businesses are crying out for affordable health care. That, along with auto-enrollment, should be what Democrats fight for in 2020.
This content was originally published here.