The health care reform debate has become — already was — a game of hot potato among individuals, insurers and the government over who pays. Last week, two competing plans failed to pass in the Senate: Democrats want to extend Obamacare subsidies for three years; Republicans want to directly fund health savings accounts.
But the real solution to rising premiums isn’t backstopping Obamacare or haggling over what might replace it — because the real issue is the total cost of health care.
If more of the cost burden is carried by insurance companies, it will inevitably be shifted back to consumers as the insurers are forced to meet the demands of their shareholders. If more of the burden is placed on the government in the form of ever-greater subsidies, it will ultimately be passed back to taxpayers.
Giving patients more skin in the game — essentially what Republicans say they want to do — can help, but only a little. High-deductible plans and health savings accounts have limited impact on what the nation spends on health care overall. They’re useful when it comes to medical services where price transparency is possible and clinical stakes are moderate — regular doctor visits and relatively minor treatments for which costs are foreseeable — but not for chronic and catastrophic health conditions. How many of us would comparison shop for heart transplants while in cardiac failure, or try to negotiate the price of chemotherapy? Health insurance exists precisely to insulate individuals from these types of risks.
High-cost, high-complexity cases drive the vast majority of overall health care spending. According to 2022 data from the Agency for Healthcare Research and Quality, the costliest 5 percent of the population accounts for about half of all health care spending, while the most expensive 1 percent drives over 21 percent of costs.
In complex cases, patients often lack the expertise to evaluate the necessity or quality of proposed treatments and procedures, and they rely heavily on doctor recommendations. That means physician discretion — as opposed to patient choice — plays an outsized role in overall spending levels.
Data from The Dartmouth Atlas of Health Care has long shown that Medicare spending per beneficiary varies greatly by region, with no correlation between higher spending and more effective care. Patients in high-spending regions simply receive more tests, more procedures and more hospital days.
These findings have been refined by studies of patients who move between high- and low-cost regions. When Medicare patients move to regions where per patient spending is high, the amount of medical care they receive spikes. But the right course of treatment for a given illness shouldn’t hinge on where patients live.
This “place effect” hypothesis was recently tested using data from the Military Health System, which found that the vast majority — up to 80 percent — of regional spending variation has nothing to do with patient conditions. Studying treatment of American personnel and their families at different locations, researchers assessed that high costs are largely a function not of sicker patients, but of local medical cultures that favor more aggressive care.
The path to greater affordability is clear: alter how physician decisions are made, reducing the amount of unnecessary care physicians call for without harming health outcomes.
The next generation of artificial intelligence that supports clinical decisions will need to be deployed more rapidly. Research published in recent years indicates that A.I.-integrated tools are already minimizing unnecessary procedures in specialties like oncology and cardiology.
On the legal side, that means making malpractice standards more uniform nationwide. The solution is not blanket immunity for physicians, which erodes accountability. Rather, physicians who follow certified, evidence-based guidelines should be presumed to have met the standard of care and be shielded from liability.
And we need alternatives to America’s fee-for-service model that compensates providers on an à la carte basis for visits, scans and surgeries — blood draws, bandages and much more are itemized, promoting volume over value. Building on earlier experiments, the Affordable Care Act piloted an alternative: a Medicare payment model that paid flat rates for a course of treatment, not itemized bills for every procedure. The results have been promising but modest, in part because the experiments have often been voluntary.
Estimates suggest that as much as one quarter of health care spending in the United States is wasteful. With premiums for a family of four with employer-sponsored health coverage amounting to more than $26,000 per year on average, eliminating waste through more evidence-based approaches to care could save such families thousands annually.
This won’t be easy. Most Americans under 65 have employer-based health coverage, and many may be reluctant to tinker with the system, despite recognizing that their premiums keep increasing. But a real fix is not found in the debate over who pays the needlessly bloated bill. Unless we actually address what makes health care so expensive, the fight we’re having today will keep coming back around.
Peter R. Orszag is the chairman and chief executive of Lazard. He is a former director of the Office of Management and Budget and the Congressional Budget Office.
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