Healthcare in The US is Broke

by May 15, 2020Business

Is the US Healthcare System broke? I am not sure that’ is even a good question because everyone pretty much knows that it is broken. Yet year after year, the system continues to go on with the same problems with nothing in sight to correct this behemoth issue starring Americans in the face. The reason is, people have to have health insurance, so they go along with it. 

Here are 12 of the primary reasons as to why the healthcare system is broken.

#12 Legal Cost 

This is the legal cost of defending hospitals against lawsuits. These lawsuits range from misdiagnosis up to super high-level malpractice cases. This number is estimated to be 2.4% of total healthcare costs. Now 2.4% may not sound like a significant number; however, with the total cost of healthcare at approximately $3.5 trillion, 2.4% is 84 billion dollars, which is not an insignificant amount. To put this in perspective, as of 2018, there were approximately 296 million people with health insurance in the United States. Doing some simple math by taking $84 billion divided by 296 million equals $284 per year or $24 per month added to everyone in the United States premiums just to pay for legal fees. It is driving up health care costs.   

#11 Fraud Cost 

Fraud is rampant in the healthcare systems. There are large amounts of money, large amounts of claims, and not enough resources to monitor all the activities. This is a breeding ground for fraud. Some of the more basic estimations of fraud in the healthcare system within the United States are estimated to be 3% of total healthcare costs, which is a conservative number. Some estimates go as high as 10%. Doing some simple math again, and using the conservative estimate, we have $3.5 trillion * 3% equals $105 billion. Using the same 296 million health insured Americans divided by $105 equals $355 per year or $30 per month. Health care spending should be avoided.   

#10 Administrative Cost 

The United States spends more on administrative costs than any other developed country in the world for healthcare. This is mainly because the US does not have a single-payer system like other developed countries. America solely depends on private insurance companies to interface with providers in which there are thousands. Have you ever seen multiple insurance companies and numerous providers work seamlessly? Each one is different, with different sets of requirements, meaning they have to recreate the wheel each time.  

This causes tremendous amounts of and efficiencies. If we’re using our same example to be consistent, the math is $3.5 trillion * 7.9%, which equals $276 billion. This works out to $932 per person or $78 a month. Legal, fraud, and administrative cost combined are $1,571 a year or $131 a month per insured American. This is before paying for the actual cost of health insurance. This $131 a month is just an additional fee to have the insurance in the first place. This is an additional cost before the true medical expenses.       

#9 Three Types of Healthcare Users

Health insured individuals fall into one of three categories. The first is extremely healthy and only use healthcare on a minimal basis. These individuals we’ll go to the doctor for their annual physical and maybe a prescription. The next group is medium-level users. These individuals will see the doctor more than once a year, have more than one prescription and have a procedure or hospital stay. The last group is heavy users of health insurance. These are the chronically ill, terminally ill, seeing multiple doctors and multiple hospital visits each year.  

America’s issue is that the first group of extremely healthy is dwindling and moving to the second group. The second group is growing and starting to move to the third group. Effectively Americans are becoming less healthy and using their health insurance more, ultimately driving up the cost.  

#8 Pharmacy Costs are Increasing Faster than Healthcare Costs

Pharmacy is a double-edged sword because you can cure or subdue a lot of elements within the human body; however, this comes with a high price. To put this into view, pharmacy represents about 30% of the total healthcare cost in America.      

Some articles have recently stated that pharmacy cost has slowed down. But you would have to take a much closer look to understand why this is the case. For the most part, recent blockbuster drugs have lost their patents, and generics have now flooded the market, lowering the price. This is the main driver for reducing some of the pharmaceutical costs in the past few years. This will only last for a short time due to new prescriptions coming out with 20-year patents. In the past 30 years, pharmacy costs have gone up tenfold. And to make matters worse out-of-pocket costs for the customer are increasing. Which means the individual pays more for the drug themselves.  

There are no federal guidelines for the cost of prescription drugs. The FDA, which is the governing body for prescriptions, oversees quality and safety but has nothing to do with the price. Therefore pharmaceutical companies can pretty much set the price at whatever they want, especially for drugs that aren’t super high demand. Just look at this one example of Cuprimine, a medication used for rheumatoid arthritis, which increased 2,143%, from $6 in 2011 to $135 in 2015. If you do some checking, you can find drug after drug with the same type of results. 

Unlike healthcare, where you can choose from many different plan options with pharmacy, it is one-size-fits-all. Pharmacy plans do not come in different category types like their counterpart healthcare plans do. They will have to select and pay the same amount as a high pharmacy user for low pharmacy users. Category plans for pharmacy would allow individuals to pick and choose what is right for them and their budget.

#7 Technology is a Key Driver in Medical Cost Today

Technology has benefited the medical industry and caused rapid advancements in healthcare. Some of the benefits of technology in the medical field are reduced hospital stays for procedures. Not that long ago, back surgery would have required days in the hospital to recover, and now these surgeries are done on an outpatient basis or at most one night stay. Reducing hospital stays has also reduced infection rates by keeping people out of areas with high germ content.  

MRIs and CT scans can now produce phenomenal images allowing physicians to pinpoint exact issues with a high degree of accuracy. This new technology, hardware, and software is excellent at aiding patients but has a too high cost. For example, an MRI can cost over $2,000, which is a lot of money for an image and generally leaves the patient with a surprise bills.

Americans are always demanding the newest technologies, and the healthcare industry is quick to provide. There’s not much difference when the new phone comes out; Americans jump on it as quickly as possible. Does the new phone do much more than the old phone? Not really? But it is the latest phone, so everyone has to have it. The same is true for medical technology. Doctors want to use the newest equipment that gives the best results to increase healthcare quality.  

There are no restrictions on healthcare technology imposed by the federal government. Therefore when the nearest MRI machines available, hospitals buy them, and doctors will use them. These cost increases for the new technology are passed on to consumers in their health insurance. This is pretty simple to do when the customer does not see the cost until the bill is sent from the insurance company.   

#6 No Transparency in Cost

Have you ever gone to the doctor’s office and seen the prices listed? Ever see a menu with a list of services and costs for each one at your primary care physician? NO, you have not. The medical industry is the only industry that I can think of that you go for services and have no idea of the cost. Whenever you have your car worked on, the first thing you ask is how much it will cost. The same goes for your house and just about anything else the costs you money.  

So why is the medical industry so different? If all doctors have to be board-certified, which means they are at some minimum competency level and measured by medical boards, you would think they should take all charge about the same price. However, you do not see the price when you leave the doctor’s office. You don’t know the price until you get the bill from your insurance company. The statement you received from the insurance company requires a lot of deciphering. There is a billed amount that the doctor/facility charges, a paid amount that the insurance company pays, which the two never match. And then there’s a reminder that is the individuals responsible in the form of copayment or deductible or combination thereof.

If pricing was transparent and most doctor visits are for primary care, why can’t the individuals shop doctors based on their price? By not showing prices at the doctor’s office, this is effectively interfering with the simple laws of economics. Simple economics state that price and demand will set at equilibrium; however, if the price is not a factor, demand can arbitrarily be changed to increase an artificial price.  

This is precisely what the medical and pharmaceutical industry do to consumers. Medical prices and pharmacy prices are not posted, and the individual consumer does not know what they’re paying for until they get the final bill from the insurance company. By then, it is way too late to question the cost of the services/products rendered.  

#5 Healthcare Industry has not Changed Since Inception

Since the start of healthcare, the industry has collected premiums, pay claims, and the difference is, hopefully, profit. Health insurance companies try to get everything down to a per member per month (PMPM) level. This is taking a group of insured and figuring out the revenue per member and the cost per member to make their formula work.  

What is the formula, well it is calculating claims cost, which is to be no more than 80% of their premium? In a nutshell, they come up with the claims cost then add 20%. If they go over a 20% spread between premiums to claims, they have to refund the difference. So the healthcare industry measures claim down to the member level and adds 20% on top of that number for the premium. That is sophisticated!  

#4 Health Insurance is a One Year Contract

Health insurance is on an annual basis and not long-term. This allows health insurance to go through a one-year cycle to see what the claims will be and adjust as needed. Since companies typically renew with the same healthcare provider year after year, that allows the providers to change the numbers, typically up, each year to keep up with increasing claims. 

This opens up a sliding scale for the insurance companies to recalibrate each year and have companies pay for it. If, for some reason, the health insurance company makes a mistake, it is only for one year. The following year they can quickly correct in their favor. This is why premium increases make such a large jump each year. Insurance companies have to recoup any losses from this previous year and keep the 80% spread intact.   

#3 No Incentive for Better Health

In America, most people acquire their health insurance from their employers or through the government. Employer-sponsored health insurance programs represent 56% of all insured in the United States. Medicare makes up 17.2% of the insured, and Medicaid represents 19.3%. The combination of these three totals, 92.5% of all healthcare insured people in the US. Employed sponsored programs entitle the employee to purchase insurance through their company with the assistance of the employer. The employer is paying a large chunk of the cost, and the individual employee is paying a smaller portion. These are government-assisted programs for both Medicare and Medicaid in which the government pays a large amount or all of the premiums.   

Because most Americans receive their insurance from some assistance, they can somewhat take it for granted. You know it is just the way it is. Their employer or government is absorbing the majority of the high cost of insurance. Therefore there is little incentive for the individual to be as healthy as possible to reduce healthcare costs because they’re not paying for it. It is somewhat apparent that Americans have come to take their health for granted, as the CDC reports, obesity is currently at 42.4%. I would suspect that if Americans had to pay for their health insurance and based on some health score, the obesity rate would be nowhere close to what it is today. People are motivated by money, especially cost, and when something hits them in the wallet, they will start to pay attention.  

#2 Healthcare Views All Members Equally

The healthcare industry, as a whole, views its members as equal. This may be a little difficult to understand or possibly be a bit irritating but let me give you an example to explain. If you have three people who all work simultaneously receiving their health insurance from the same employer. The main distinction in price will be the five key elements: individual vs. family plan, location, age, tobacco use, and the plan category. Let’s also say none of the three use tobacco; they all chose the individual plan and are in the same location to keep things simple. In this example, two of the employees are very healthy, exercise regularly, eat well, and only use a doctor for their annual physical. The third employee is on multiple medications for high cholesterol, high blood pressure, diabetes, etc. Is obese, which is causing major issues. They have poor eating habits and do not exercise.  

In this example, the only thing that will differentiate the premium in these three individuals will be their age and health plan. Effectively the two healthy people will be compensating for the one unhealthy person who will be using health benefits extensively. This is because premiums are charged evenly over the entire group. Remember per member per month (PMPM). So for the two healthy employees, it does not benefit them from a premium perspective.        

#1 No Health Checks Required

Five key factors impact the cost of premiums for health insurance. They are age, location, tobacco use, individual vs. family enrollment, and what plan category. The plan category is the choices in coverage that you get. The more robust coverage means more doctors and hospitals in the network, lower deductibles, and lower copays will determine premium levels.

None of the five key factors that impact premiums’ costs have much to do with an individual’s current health. There are absolutely no checks for height, weight, measurements, blood work, medical history, hobbies and sports (potentially dangerous), diet, exercise, drug and alcohol use, etc. This is a link to the US Health Insurance Marketplace application. This application’s questions are related to personal information like address, occupation, income, other types of health coverages, and dependants.  

The general information collected on an application for health insurance is quite limited in the scope of the individual’s current health. We know that health insurance companies cannot exclude individuals for pre-existing; this is not what I am talking about. I am referring to the current quality of health an individual has when purchasing a health insurance policy. If an individual has health concerns, the insurance company should not be able to disqualify them; however, they should be able to charge more for this health concern as they could be a higher use of the policy.  

Auto insurance charges more for individuals that are at higher risk. If you have an accident, your premiums will go up. Same if you have a lot of tickets. You are charged for your risk with auto insurance. Why is health insurance not the same?               

Life insurance is another example; if you have tried to get a life insurance policy, generally on half-million and up, the first thing you would have to do after the application is to have a nurse visit you. The nurse would draw blood, take measurements, get weight and height, get all of your medical histories, review all of your hobbies and sporting activities, and other factors. This will give the life insurance company a great deal of information about the insured’s current health that they’re putting the policy on. With life insurance, many individuals are denied for previous health issues, hobbies and sports, and other activities that preclude them from getting insurance in the first place.  

The same is true if you apply for disability insurance. After the application is completed, a nurse would do the same battery of work before deciding insurability.

Life and disability insurance are for extended lengths of time. Some life insurance policies are for life or until the person passes away and generally, high value, so the life insurance company has to know their policyholders better than a simple application; otherwise, they would probably go out of business. Health insurance takes the individual and works out the discrepancies the following year.     

Closing Thoughts

The healthcare system is a fee-for-service program. The more times the service is used, the more the service will cost. Adding more people to this broke system will only continue to break down the system more. If this industry is left unchanged, it will price itself out of the market and cause employers and the government not to afford the health insurance they currently provide. 

Fundamental changes will have to be made to reduce healthcare costs in the United States. Americans will need to get healthier to be less dependent on healthcare. Healthcare providers will have to get much more efficient and reduce administrative costs. All policyholders can not be viewed as the same and will have to be able to purchase on a health score basis, so there is equality like in other insurance industries. Pharmaceuticals will have to be regulated, and pharmaceutical plans will have to come in categories. They are agreed-upon technology I have to become a standard versus going after the newest piece of technology.

The healthcare industry is fragmented with little direction or incentive to become more efficient than other insurance industries. The good news is there is plenty of opportunities to improve, become more streamlined and correct years and decades of doing business the same old way. The bad news is nothing has changed over the decades except a high deductible health plan to make sure the person really wants to use their insurance. The other growing concern is the leading cause of personal bankruptcy is no health care coverage or not enough to cover high-cost procedures.                    

If you don’t have time to take care of your health, YOU WILL make time to take care of your illness!  What side of the equation do you want to be on?

Hello, my name is David Zaepfel. I blog about things that matter to you and try to break them down into simple and easy terms so that you can understand what is really going on.  I am a firm believer that simple is the best way to go.  Don’t overly complicate things as life is complicated enough without being bombarded with over the head talk.  Keep it simple!  Let me know what you think.

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