I can predict when one of my newsletters is going to divide a lot of readers. This is one of them. I’m going to argue that the problem with health insurance and the health care system overall is misaligned incentives. It is, in other words, a problem of structure, not any individual’s morality. Evil should not be part of the conversation. Nor — and I hate to have to say this — should killing.
In 2020, long before the shooting of Brian Thompson, the chief executive of UnitedHealthcare and a father of two, the health economist David Cutler of Harvard ended an article about health care reform by acknowledging that people are not persuaded by econ-talk on this issue. “In addition to figuring out what is technically correct, we need to learn how to explain those reforms to worried people,” he wrote. He concluded, “Speaking morally, as well as economically, is the biggest challenge in health policy.”
Despite Cutler’s caveat, I’m going to shy away from speaking morally and stick to laying out some of the misalignments that complicate health care and the insurance of it in the United States.
The biggest one is that a purely free market can’t work in health care because we (correctly) regard some basic level of care as a human right. If health care were chocolate cake, people who couldn’t afford it wouldn’t get any, and that would be OK. We have different feelings about treatment for a broken leg or a heart attack, which everyone is entitled to, even the penniless. That’s why we have Medicare, Medicaid, Obamacare subsidies, tax deductibility of premiums and more.
How much care are people entitled to as a basic human right, though? Take GLP-1 receptor agonists, the apparent miracle drugs that control diabetes, promote weight loss and are being tested for their effectiveness against chronic kidney disease, Alzheimer’s, liver disease and other ailments. Problem is, they list for around $1,000 a month, and even though insurers get them for less than that, the total cost would be astronomical if every American who could benefit started taking them. (Nearly three-quarters of American adults are overweight or obese.) Someone who wants to lose a little weight to look better in a bathing suit is probably not an ideal candidate.
Because we don’t allow the free market to serve as our rationing mechanism, someone has to serve as gatekeeper, saying yes to some people and no to others. That someone is bound to be deeply unpopular. It appears that Thompson may have died for being a gatekeeper.
I’m not here to say the health insurers are always right. Far from it. We’ve all felt our blood boil when a claim was rejected. As The Times has reported, a Senate committee concluded this year that to increase profits, UnitedHealthcare, Humana and CVS, which owns Aetna, denied claims for nursing care to patients who were recovering from falls and strokes. Stat, a health news outlet, reported that a UnitedHealthcare subsidiary, NaviHealth, used algorithms to deny care for seniors enrolled in the company’s Medicare Advantage plan.
But this is a structural problem, not an issue of one executive, one company or even one industry. Insurers have a fiduciary duty to their shareholders, which corporate boards usually take to mean maximizing profits within the law. If an insurer is breaking the law, there are civil or criminal remedies. If it’s earning outsize profits by regularly denying legitimate claims, the companies that hire it will hear complaints from their employees and face pressure to switch to another insurer that denies less often. If your employer sticks with an insurer, you should take it as a big hint that your bosses are happy with the insurer’s denial rate, since in the long run, on average, employers share the savings with the insurers.
Regulation also helps. The Affordable Care Act, also known as Obamacare, sets minimums for the percentage of premium income that insurers must pay out in the form of medical claims.
UnitedHealth Group, the parent of UnitedHealthcare, earns a lot of money. Its return on equity, which is the profit earned per dollar invested by shareholders, averaged 25.9 percent from 2019 to 2023, compared with 17.6 percent, on average, for all the companies in the S&P 500, according to a calculation for me by FactSet, a financial information company.
But the profits of UnitedHealth and its peers are still just a small fraction of premiums paid: 2.4 percent for the industry as a whole, according to a compilation of public reports by AHIP, an industry group. Even if profits went to zero, Americans would still be paying more than people in other countries for health care.
The biggest factors in the higher cost of American health care are not insurance profits but high prices charged by providers of inpatient and outpatient care and higher administrative costs, according to the Peterson Center on Health Care and KFF, formerly the Kaiser Family Foundation.
High prices are evidence of market power from consolidation. High administrative costs are the result of a war over who pays and how much. Industry consolidation has bulked up the providers, just as it has the insurers, and the two sides are locked in a struggle like a pair of sumo wrestlers, Cynthia Cox, the director of the Peterson-KFF Health System Tracker Project, told me.
Complicating matters further is that health insurers don’t just insure anymore. Through its Optum unit, UnitedHealth is the biggest employer of physicians in the country. It also owns OptumRx, a big pharmacy benefit manager, which negotiates with drugmakers. In September the Federal Trade Commission sued the three biggest pharmacy benefit managers for, it said, “engaging in anticompetitive and unfair rebating practices that have artificially inflated the list price of insulin drugs.”
Matt Stoller, a blogger specializing in antitrust, wrote Thursday, “We have large unmanageable bureaucratic nightmare corporations negotiating with each other across endless lines of business, along with untrackable flows of money and opaque pricing.”
More competition is the standard economists’ solution to inordinately high prices. Indeed, the Federal Trade Commission has sought to block health care mergers that would reduce competition and raise prices for consumers. Overall, though, the big companies have gotten bigger and more powerful.
In cases where competition falls short, more regulation of prices is the natural solution, Sherry Glied, the dean of New York University’s Wagner School of Public Service, told me. That would face pushback from providers and free-market types, she acknowledged. “It’s incumbent on people who think regulation is the wrong way to go to explain what else they would do,” she added.
Five percent of people ages 18 to 64 accounted for 53 percent of health care spending by that age group, according to the Peterson-KFF Health System Tracker. Emphysema, heart disease, diabetes, stroke and asthma are among the most costly diseases to treat and are frequently (but not always) related to preventable risks such as smoking and obesity. Doctors could put more effort into prevention, but they’re not sufficiently compensated for that kind of work by insurance. Insurers don’t have much incentive to pay for prevention because it costs a lot upfront and the benefits may not be reaped for decades, when the insured could well be covered by a different company.
The long-running dilemma of health care — not just in the United States — is that misalignment of incentives is almost unavoidable. If you pay providers a fee for each treatment they give, they’ll have a financial incentive to overtreat. If instead you give them a flat fee per patient, perhaps adjusted for how healthy the person is, as in Medicare Advantage, they’ll have an incentive to undertreat and pocket the savings. UnitedHealth has coped with that dilemma by becoming both the insurer and the provider.
By buying companies in every link of the health value chain, UnitedHealth has built up what amounts to something like a private version of a single-payer national health care system. “If you treat the entire network like a utility, you could plug those spigots so that there is no financial gain from gouging patients, pharmacists, physicians, and the government,” The American Prospect wrote in a profile of UnitedHealthcare last year.
These are tough problems, and I don’t expect to see much progress on them over the next four years. Project 2025, a detailed conservative blueprint for how the next president could govern, has little to say about the insurance system except to say that it “induces overconsumption of health care, limits consumer shopping and hides true costs from patients.”
Donald Trump, who tried for years to get Obamacare repealed, is still talking about “concepts of a plan” to replace it, with no apparent urgency. He might push for more transparency in pricing, a good idea that he also pushed for during his first term. He hasn’t been clear about whether he would stop President Biden’s initiative of negotiating down the prices that Medicare pays for drugs.
Senator JD Vance, the next vice president, has put forward the throwback idea of dividing people between high-risk and low-risk plans. In theory, the people in the high-risk pool could be protected by generous government subsidies of their care. But the last time it was tried, the subsidies were insufficient, and it’s easy to imagine that happening again.
There’s also a deadline coming up: At the end of 2025, extra subsidies for people buying insurance through the Affordable Care Act marketplace, which were created during the pandemic, are set to expire, “potentially causing premium spikes and coverage losses for an estimated four million people if Congress fails to extend the enhanced assistance,” the Commonwealth Fund said in a September report. Some Republicans in Congress are also seeking to turn Medicaid into a block grant to states, which could result in worse coverage.
Health care was once seen as a higher calling but has become strictly a business for many players, even organizations that are nominally nonprofit, Lovisa Gustafsson, the vice president for controlling health care costs at the Commonwealth Fund, told me. “It’s heartbreaking to hear some of the stories and see the frustration that people are feeling,” she said.
As you can see, it’s complicated: There are many parties with conflicting objectives and many incentives that aren’t aligned for the best outcomes.
Tragically, Thompson’s shooting wasn’t a solution to anything. “The way we let a murderer manipulate us into having the conversation he wanted is grotesque,” Michael Cannon, the director of health policy studies at the Cato Institute, who favors a free-market approach, told me. Let’s all lower the temperature and focus on practical fixes, not emotional discharges.
The Readers Write
I have been making my own Christmas cards since I was in elementary school. Now most of my cards are very detailed and sometimes use sophisticated light and electron microscopy imaging. This wreath is an example. (For 27 years I have been an electron microscopist at the University of Pittsburgh Medical School.) It’s hard to take anyone off the list, even if we never really connect anymore, save for sending the card.
Donna Stolz
Glenshaw, Pa.
I am a firm believer in sending Christmas cards, and I keep an old, battered address book that is pressed into service once a year. It is a cherished record of decades of cards sent, with the names of people who have passed away, color-coded lists and far-flung acquaintances from all over the world. I write all of the addresses on the envelopes by hand, a task that brings me no end of joy. I love the idea that weak ties are important and deserve celebration.
Celia McAllister Sandbloom
Amsterdam
Concerning your newsletter on Scott Bessent, Donald Trump’s choice for Treasury secretary: I think the Bank of Japan’s rate hikes will make the yen stronger and relieve inflationary pressure, as Japan imports tons of essential goods from overseas. Wages and consumption deteriorated in real terms since inflation started picking up more than two and a half years ago. Lower inflation will help people achieve higher wages and consumption in real terms.
Hiroshi Utsumi
Ogaki, Japan
Scott Bessent’s logic — that because Japanese are big savers, they will stimulate the economy by spending more if their interest income increases — trips over the illogical belief that big savers will spend merely because their income increases. No, they will just be happier because they can save more.
William Pendergast
Carmel, Calif.
Quote of the Day
“For 40 years, the antitrust agencies didn’t just ignore labor markets. The policymakers at the agencies, laser-focused on efficiency, actively endorsed the benefits of ‘cost cutting’ and other efficiencies that squeezed workers.”
— Elizabeth Wilkins, then the director of the Office of Policy and Planning at the Federal Trade Commission in a March 20, 2023, speech. She is to become the president of the Roosevelt Institute, a think tank, in February.
The post America’s Health Care System Needs Better Economics, Not Bullets appeared first on New York Times.
