The Numbers Behind Fixing Health Care In America

On March 23, 2010 Democrats slammed a health care plan through Congress that helped many Americans, but it is far from perfect. Now Republicans are offering a plan that will leave millions of Americans without insurance.  It seems as if Congress is unable to fix health care, however the current system is unsustainable. According to the Centers for Medicaid and Medicare the U.S. spent $3.2 trillion on health care in 2015. That’s $10,035 per person . It’s an insane amount of money.

Turns out it is possible to lower costs and improve care, but it’s not as easy as I thought when I started the research for this article.  

The answer involves us reimagining health care. I’m going to call it “universal coverage” for the sake of simplification and because calling it “a combination of public and private insurance that requires 100 percent participation in the public portion while preserving private insurance benefits” is accurate, but awkward.  

Many are opposed to a system like this and cite six reasons: “I don’t want to pay for insurance for others,” “I don’t want to lose my current health insurance benefits,” “my quality of care will go down,” “universal coverage is anti-capitalist,” “pre-existing conditions are going to kill the insurance industry,” and finally, “it’s too hard to do!”

All of these objections can be overcome with facts.

We are already paying for the health care of others.

According to the Henry J. Kaiser Family Foundation , the cost of “uncompensated ” health care in America in 2013 was $84.9 billion of which state and federal governments paid $52.6 billion, leaving $32.3 billion unpaid. To cover the unpaid cost, providers and payers raise rates; the rates insured Americans will eventually pay.  The amount of unpaid costs is a pittance of the amount that we pay through taxes that fund Medicare, Medicaid and other government programs. That number is $1.664 trillion and those programs cover 112 million people.  

Despite the benefits our relatives, friends and neighbors receive from government programs, some still want to end all government health care and never adopt a universal coverage system .  Millions feel this way, until they lose their coverage due to some change in circumstance and they stay up all night hoping their kid doesn’t die from whooping cough. Nonetheless, they simply don’t want to be made to pay for the health care of others and they believe that if they don’t pay for government programs, they won’t be paying for other’s health care. Cognitive dissonance rules.

So, let’s eliminate all government health care including the tax breaks offered to people and companies with private insurance, Medicare and Medicaid. Pause for a second, think about it and say “yes” if you want this to happen.  

If you said “yes,” you can now prove that you are definitely not paying for other’s health care because there are no Medicare and Medicaid line items on your pay stub, right? Head in the sand; dissonance resolved.   

Except now, your brother, who works 50 hours a week hanging sheetrock, cuts his hand and doesn’t have insurance. Who’s going to pay? You are, because you just said “hell yes!” to ending his coverage and he’s not “others,” he’s family.

What if the same thing happens to someone who isn’t a relative? Too bad for them, right? Let someone else pay. Turns out that someone else is you.  

Everyone who has no government insurance coverage, but who still needs health care will go to the local hospital for treatment and not pay their bill (or in some cases, just die). Providers don’t work for free so that cost will be rolled into higher fees to people who do pay. By my calculations, the insured population would have to pay $20,295 per person per year; more than TWICE what they are paying today to cover the cost of the services rendered to the uninsured.

Simply put, sick people cost money and eventually everyone will pay whether we count the cost or hide it in higher fees and pretend we don’t.  

We can’t afford to eliminate government funded health care and we already pay for the care of others, so let’s admit that we already have a type of universal coverage system for one third of Americans and maybe that’s OK.

Let’s also agree that the current programs are way too expensive and that we want an efficient system with high quality care. How can we get that?  By pooling our money, lowering costs and adopting a full universal coverage system. Heck, we’re already 70 percent of the way there based on the total spend on government health care and $400 billion in tax breaks for companies who provide private insurance to their employees.  

We’ll need to accept a mandate, but you’ll be glad we did.

We need to pool our money. Five percent of the population accounts for nearly half of health care spending and half the population has almost no health care usage.  The only way we can afford health care is if we all pool our money and share the expense until it’s our turn to personally benefit.  For this to work we’ll need a mandate; and I do mean mandate.  Not the sloppy system we have today where healthy people don’t get insurance because the cost is higher than the penalty .  Mandate as in this will be deducted from your wages like Medicare and Medicaid are today (but replace both).  The good news is that the mandate is going to save us a lot of money.

We could pay for our universal health care system using just the money we spend today.

Of the $3.2 trillion spent in 2015 Medicaid, Medicare, VA, DOD and CHIP paid $1,312 trillion, private insurance paid $778 billion, consumers paid $352 billion out of pocket, third-party party programs which includes a bunch of private and public entities paid $256 billion, money from investments covered $160 billion and other government spending was $96 billion.  Most of this money really comes from Americans in the form of fees and taxes.  In summary government programs plus the out-of-pocket payments equal $2.176 trillion, which is how much we can spend on our universal insurance system if we don’t want to raise our costs.  I’m holding out the money from private insurance because we’re going to radically change how that works.  

We need to lower the cost of care while not reducing the quality.

We have $2.176 trillion available, but we spend roughly $3.2 trillion a year so we need to lower our costs.

To understand what drives expense in America’s health care, I went looking for answers and found these three articles (and many more) that explain the issues in great detail. In summary, our health care is more expensive due to higher physician costs, overpaying for services, ordering unnecessary tests, having excess medical equipment, low hospital occupancy rates, long hospital stays, high administrative costs and a tort system that is need of an overhaul.  There are plenty of opportunities to lower our costs.

A study by BMC Health Services Research claims that $350 billion in paperwork and administrative costs savings could be realized by moving to universal coverage. On top of that, a study by the Institute of Medicine concludes that about $750 billion in fraud and inefficiencies exist in the system.  Let’s say we can cut fraud in half and realize $375 billion in savings.  Two initiatives alone provide $725 billion in savings and lower the annual cost of health care from $3.200 trillion to $2.475 trillion.

How much more would we save if we combined Medicare and Medicaid into one program? About 5 percent ($27.2 billion) of Medicaid costs are for administration. Medicare administration costs are between 2 percent and 17 percent, depending on whose data you believe, so let’s call it 8 percent or $51.2 billion. The total for both agencies is $78.4 billion.

These two agencies do much of the same thing for different people. I know they do some things differently, but in principle, they take in money in the form of taxes and fees and distribute that money to pay for health care for their participants. And they are pretty good at it. Recent reports indicate that Medicare is more efficient than private insurers and has lower administrative costs so let’s let them run our new universal coverage system.  

If we assume some efficiencies and give the new combined agency $60 billion for administration, then we’d save $19 billion. Now we are down to $2.457 trillion. That move barely lowered the costs, but does consolidate the majority of government health insurance into one program.

We can save an additional $78 billion with tort reform. Since we struggle with even basic reform, let’s say we can eek out half. That would contribute $39 billion in savings, which puts us at $2.418 trillion. We’re still short $242 billion. The good news is that we still have an unused bucket of funds, but my proposed source will make insurance companies go apoplectic.

In an Office for National Statistics Study , the average spend by six industrialized countries on private insurance is 21 percent of total health care spend. In America, it’s 33 percent ($1.056 trillion in 2015). Dropping from 33 percent of all health care to 21 percent would still allow us to spend $672 billion for private insurance. It does mean that insurance companies will be 36 percent smaller and that’s also OK also because most care will come from our universal coverage system. By applying the $384 billion we just saved to our universal coverage plan, we have a surplus of $142.4 billion. Let’s leave it in the system. All the change will be expensive and disruptive. This can help pay for it. If we do, our total annual spend would be $2.176 trillion, which is $6,824 per person.

Congratulations, we moved to universal coverage at no additional cost and put $1.024 trillion back into our economy. For perspective, we could make college free for everyone and still have $948 billion left over.

Here’s a final surprise. There are currently 28 million uninsured Americans. I factored them into all the numbers above so not only do we lower our costs, we just gave 28 million people health insurance coverage. Despite this, many will want private insurance; and they are going to get it as we’ll see later.

How is this possible?

Ah, I can hear the rumblings. “That’s a lot of change. It seems to make sense, but how do I know it’s possible?”

Ten other industrialized countries have figured out how to keep costs low AND provide higher quality of care than America. The average per person cost for them is $4,386 . We’re not going to get to that number due to many issues, but surely we could get to a number that is 64 percent higher (which is the number from above $6,824 per person). I find it impossible to believe that we can’t figure out how to provide quality health care to all Americans while spending 64 percent more per person than 10 countries who provide better care than us. Seriously.  Is anyone walking around America chanting “we’re number 11!” and admitting that 10 other countries are smarter than us?

You won’t lose your private insurance coverage.

When we move to a universal system, everyone will have coverage.  Many of the things private insurance pays for today will be covered by our universal plan, but we still need private insurance. Let’s see how it works in other countries .

In 16 industrialized countries, like in America, about 56 percent of the population has private insurance offered by companies like BUPA, Aviva and AXA. What does it look like? Exactly like the private health insurance we have today. It simply sits on top of your public universal coverage. You call your doctor, tell them you have private insurance and boom, you go to the front of the line for services. True story, my wife and I moved to the UK and she needed to renew her birth control prescription. She called the doctor’s office on a Friday and they told her to come in in three months (somehow ignoring how that might work out). She said “wait, I have BUPA.” They told her to come in next Tuesday.  See how it works? Straight to the front of the line.

“Not fair,” scream the hard-left utopians, and they are partially right, but if you want a system that works in America, this is what it looks like. It balances social responsibility and fiscal conservatism with privilege for those that earn it. For those who don’t have coverage today or find it very expensive, all your problems just got solved because you have universal coverage.  For those that have private coverage, who paid taxes, got their basic coverage and helped their fellow human beings, but also worked hard, got ahead and earned the perks of success, they will have the same coverage as they do today. It’s fair to everyone. Is it communist/socialist fair? Nope. Nor do most Americans want it to be. Is it capitalist-with-basic-social-and-fiscal-responsibility fair? Yes, it is.

Quality of care can actually get better.

Americans aren’t getting good value for money. U.S. health care is ranked between 11th out of 11 industrialized countries and 37th in the world . Using any search engine will produce an avalanche of these articles. The good news is that study -after-study demonstrates that improving health care quality  is possible.

There’s a cacophony of alarm in health care industry studies and articles about quality going down under universal coverage systems, such as this one , which claims we’d see lower payments to providers and payers (true) and limited investment in advanced medical equipment and reductions in the speed of medical progress (not true).  If this is the case, how is it possible for the rest of the world to deliver higher quality of care at a lower cost than America? Perhaps it’s because almost 100 percent of the articles that claim the sky is falling don’t consider the effect of private health care on universal coverage. Perhaps there are reasons other than self-preservation. I’m not sure, but I have great difficulty reconciling lobbyist-supported studies that show quality MIGHT go down with the fact that 36 countries with universal coverage provide better health care than we do at a lower cost.   

Universal coverage supports capitalism and reduces bankruptcy.

Want another reason to love universal coverage? Not adopting it is undermining entrepreneurism. Want to start a company? I hope so because new business accounts for most net new job creation . But there is a problem. You and the people you hire need insurance. This issue alone keeps people from starting companies . Even the partial universal care we have under the ACA today, may allow the creation of 25,000 new businesses a year . If you want to improve the economy, we’ll need more startups and full universal coverage enables their creation.

Universal coverage will also reduce bankruptcy, which means more people can stay in their houses and buy stuff to drive the economy. About 2 million Americans a year go bankrupt and unpaid medical bills are the number one cause. In addition, approximately 10 million Americans will find themselves with medical bills that they can’t pay and more than 25 million Americans don’t take their medication because of the expense. As they become unhealthier, their cost of care will increase as will their inability to pay, so the burden will fall on the rest of us.

There are other effects. When I worked at Bank of America, I looked at our mortgage data and found it would have been cheaper for the bank to pay for health insurance for some customers than to take the losses associated with repossessing their house due to issues with lack of health care coverage; millions cheaper in aggregate. In many ways, moving to universal health solves this problem and the additional benefit, is that families have shelter and stability.

Lowering the number of bankruptcies and helping people pay for their medicine is good for the economy and good for us.

What about all the job losses?

Job losses are part of the cycle of capitalistic system improvements as is new job creation brought about by innovation and change. What’s the net impact? There are some wild estimates out there, but this article from Fortune indicates that we’d lose about 2 million jobs if we adopt universal care. Alternatively, a recent study by the California Nurses Association indicates that 2.6 million new jobs would be created. I think the actual answer is unclear. What is clear is that the move to universal coverage will cause change.

The single-payer component would combine parts of private insurance, Medicare and Medicaid into one system and some of the efficiency gained will come at the cost of jobs. In addition, private insurance will shrink dramatically; which will also cost jobs. However, the shift from spending money on administrative expenses to care provision, would create new jobs as would the growth needed to help the 28 million people we just added to the system.  The available information paints a mixed picture, but in the end, it doesn’t matter because we must make these changes and jobs will be lost and gained.  

What about preexisting conditions? Won’t those increase the cost of our system?

The hubbub about preexisting conditions is a subterfuge by insurance companies to distract imbeciles in Congress.

The insurance industry is adamant that they are harmed by covering people with preexisting conditions because of something called adverse selection.  What they are really saying is that if they offer coverage for preexisting conditions then more sick people will sign up and cost them more money.  This is partially true without universal coverage.  

Private insurance, like universal coverage works by pooling money from a mix of healthy and sick people. Insurance companies like to keep out people with preexisting conditions because they cost more than people without them.  They think that simply refusing to cover preexisting conditions for individuals, those people won’t join their pool of insured.  They are partially right.

Let’s say you are one of the 29 million Americans who have diabetes and you are an entrepreneur. You’d like a private insurance policy, but the cost is too high so you don’t get one. Problem solved for the insurance industry.  Well not quite because you have a wife and two kids and need insurance so you find an employer to hire you and get their insurance. Many large companies are self-insured, which means they pay most of the cost of insurance and have private companies administer the process. Insurance companies love this because the employer takes most, but not all, of the risk.  Self-insured companies have extra insurance from private insurers in case a person’s condition causes very high cost. You know, like people with preexisting conditions. Guess what? They got you anyway.

Under universal coverage, the government will bear most of the cost for people with preexisting conditions. Insurance companies don’t recognize this in their alarmist rhetoric because they don’t think we’ll ever have universal coverage.  If they’d admit we need to move to universal coverage, most of their problem with preexisting conditions goes away.

It is hard to make all these changes.

We just used facts and logic to lower our cost of health care. We also covered all Americans, kept private health insurance for those that have it, improved the quality of health care, stimulated the economy and eliminated issues with pre-existing conditions.

You know who can’t live with it? Insurance companies. Their size change would be stunning. In 2015, $1.056 trillion was spent by insurance companies.  With universal coverage, the number would be $672 billion. Private insurance is now 36 percent smaller. That’s 384 billion reasons they fight so hard to maintain status quo instead of doing what’s best for all Americans.

Know who else can’t live with it? Pharmaceutical companies. American drug costs are two to three times higher than the cost of other industrialized countries. Americans spent $425 billion on prescription drugs in 2015. If we spent 50 percent less due to negotiated rates, the industry would lose $212.5 billion. Drug companies need to earn a profit so they can invest in new drugs. Because we don’t have national negotiated rates, the excessive cost we pay for drugs subsidizes the lower cost in the rest of the world. It turns out that Americans aren’t just paying for the drugs of other Americans, we are paying for drugs used by people world-wide. When we move to universal coverage, we’re going to decimate pharmaceutical company margins and they’ll have to make up some of that through higher costs around the world.  Seems fairer actually, but it will be painful for the industry.

Doctors don’t like universal coverage either because it will mean lower income. Critics of universal care suggest that the lower income will reduce the incentives for people to become doctors and therefore create a shortage.  Is that true? The best estimates I could find show that the average doctor will experience a 12 percent drop and specialist would fare worse. Doctors spent a fortune to go to college and save lives. They deserve to be paid well, but a 12 percent drop from an average of $294,808 ($272,000 from the study adjusted for inflation) would mean they would make $259,431 and still be in the 99th percentile of earnings. Painful? Yes. Devastating and a big enough change to keep people from becoming physicians? Unlikely.

Turns out that it is possible to fix health care in America. We have a huge amount of money available, we just need to redeploy it. Private insurance and pharmaceutical companies will see dramatic changes to their business, but individual Americans can win big.