(Corrects reference to foreign health systems similar to Obamacare in paragraph 9.)
Jan. 8 (Bloomberg) -- Documentarian Michael Moore greeted the introduction of Obamacare with an admission many liberals will cheer. “Obamacare is awful,” he wrote.
Its awfulness, Moore said, stems from “one fatal flaw: The Affordable Care Act is a pro-insurance-industry plan implemented by a president who knew in his heart that a single-payer, Medicare-for-all model was the true way to go.”
Like Moore, I’d prefer a more nationalized health-care system. But his analysis relies on a common mistake that distorts both the benefits of single-payer systems and the deficiencies peculiar to Obamacare.
Insurers are the bogeymen of American health care. That’s in part because they do a lot of the unpopular stuff: They’re the ones who charge you money for health care, who say you can’t get something you want, who your bosses blame when they deduct more money from your paycheck to cover health costs. And it’s hard to see what value they add to the system.
Yet the problem with the Affordable Care Act isn’t the insurance industry. In fact, the main benefits of nationalized health care can be achieved in systems with hundreds, even thousands, of for-profit insurers.
Insurers aren’t even where the big money goes. In 2009, Forbes ranked health insurance as the 35th most profitable industry, with an anemic 2.2 percent return on revenue. To understand why the U.S. health-care system is so expensive, you need to travel higher up the Forbes list. The pharmaceutical industry was in third place, with a 19.9 percent return, and the medical products and equipment industry was right behind it, with a 16.3 percent return. Meanwhile, doctors are more likely than members of any other profession to have incomes in the top 1 percent.
In general, Americans don’t use more health care than citizens of other countries. But we pay a lot more for the health care we do get. Data gathered by the International Federation of Health Plans show that an MRI costs, on average, $1,121 in the U.S. and $363 in France. An appendectomy costs $13,851 in the U.S. and $4,782 in Switzerland. A birth by cesarean section costs $3,676 in the U.S. and $606 in Canada. A bottle of Nexium -- a common acid-reflux drug -- costs $202 in the U.S. and $32 in the U.K.
The dirty truth about American health care is that it costs more not because insurers are so powerful, but because they’re so weak.
There are few truly single-payer systems in the developed world. Canada has one, as does Taiwan. Most countries rely on many, many insurers. Germany, for instance, has more than 150 “sickness funds.” The Swiss and Dutch health systems look a lot like Obamacare’s health-insurance exchanges. In France, about 90 percent of citizens have supplementary health insurance. Sweden has moved from a single-payer system to one with private insurers. Yet all these countries pay vastly less for drugs, surgeries or doctor visits than Americans do.
Why? Because in every case the government sets prices for health-care services and products. Insurers in Switzerland don’t negotiate drug prizes with Pfizer. The Swiss government simply sets its drug prices and lets Pfizer decide whether to sell in Switzerland -- or not.
“The problem is that in the U.S. payers are fragmented while in other countries they are unified even if there are many insurers,” said Gerard Anderson, director of the Center for Hospital Finance and Management at Johns Hopkins University.
In the U.S., insurers negotiate with hospitals and drug companies on their own -- and they pay more as a result. In fact, because of their weak negotiating position they frequently use whatever price Medicare is paying as a baseline and then, because they lack the power to strike a similar deal, add a percentage on top. Joshua Gottlieb, an economist at the University of British Columbia, found that when Medicare increases what it pays for a service by $1, private insurers increase their payments by $1.30.
That leaves the U.S. with the worst of both approaches: Prices aren’t set by the market, but they also aren’t set by the government. Consequently, Medicare’s negotiating power is weakened by the threat that drug companies or hospitals will opt to do business only with higher-paying private insurers. We simultaneously miss out on the efficiency of a purely private system and on the savings of a purely public one.
If insurers lose on negotiating with medical providers, however, they’re much better than the government at innovating on insurance design. Co-pays and deductibles aren’t popular, but they work. Many insurers are experimenting with ways to create incentives for better health, including using personal technology -- everything from e-mails to smartphone cameras. (The disastrous introduction of the Obama administration’s HealthCare.gov website hardly instills confidence in the government’s capacity to exploit digital medicine with similar efficiency.)
“Single payer isn’t a panacea,” said Uwe Reinhardt, a health economist at Princeton University. “The magic they have is setting rates. But neither Medicare nor Canada has done anything innovative on the delivery side. Taiwan is trying a little bit but not a whole lot. By and large they just pay bills.” The limitations of single-payer systems became clear during the health-care debate, when the Congressional Budget Office projected that premiums for a public option would be higher than premiums for private insurance -- unless a public option could avail itself of Medicare’s pricing power.
A health-care system that followed international best practices would direct the government to set rates. Or it would let insurers band together and negotiate rates collectively -- a practice called “all-payer rate setting.” But it wouldn’t need to eliminate private insurers. It’s good for consumers to have a choice of insurers, who have real incentives to innovate and devise better ways to keep customers healthy and costs down.
It’s health-care providers -- not insurers -- who have too much power in the U.S. system. As a result, they have the most to lose if health-care prices fall. But, as is often the case, political power flows in part from popularity. So politicians who routinely rail against for-profit insurers are scared to criticize -- much less legislate against -- for-profit hospitals, doctors or device manufacturers (though drug companies come in for a drubbing now and then). These are the people who work every day to save our lives, even if they make us pay dearly for the privilege.
(Ezra Klein is a Bloomberg View columnist.)
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