Opinion

Opinion | Jeffrey D. Sachs

Disparities and high costs fuel the health care crisis

Part of a weekly series on the economic choices facing the United States and its relations with the rest of the world. For previous entries, click here.

AMERICA’S HEALTH CRISIS is really three crises rolled into one. The first is public health: America’s life expectancy is now several years below that of many other countries, and, for some parts of the population, life expectancy is falling. The second is health inequality: The gaps in public health according to race and class are shockingly large. The third is health care cost: America’s health care is by far the costliest in the world.

Obamacare certainly did not solve these crises. Its main positive contribution has been to expand health coverage. Americans without health insurance fell from around 15.5 percent of the population in 2010 to around 9.1 percent today, a significant decline. Yet health care premiums are once again soaring, and the deeper causes of poor health are not being properly addressed. Obamacare amounted to a limited patch on a flawed system.

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The numbers tell the story of the three crises. First, US health outcomes are actually below the averages of other high-income countries in the Organization for Economic Co-operation and Development, or OECD. US life expectancy at birth in 2013 stood at 78.8 years, almost two years below the OECD average of 80.5 years. The United States also had higher-than-average infant mortality, a greater incidence of low-birth-weight babies, and a higher incidence of both breast cancer and prostate cancer.

Second, regarding the inequality of health care and health outcomes, US health insurance coverage as a share of the population is ranked 33rd among the OECD, with 86.7 percent (rising to 90.9 in 2015, because of Obamacare), ahead only of crisis-stricken Greece.

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America’s health outcomes are starkly unequal by class and race. According to the Health Inequality Project, the richest 1 per cent of American men have a life expectancy of 87.3 years, a remarkable 15 years longer than the poorest 1 percent of American men, at 72.7 years. As for race, non-Hispanic white life expectancy in 2014 was 78.8 years, 3.6 years longer than for non-Hispanic blacks, at 75.2 years.

Third, regarding the costs of the health care system, America’s costs are out of sight, far above those of other countries. America spent a remarkable $8,713 per person on health care in 2013 (the most recent year of comparable OECD data), with the next most expensive country, Switzerland, spending just $6,325. As a share of national income, US health spending came to a whopping 16.4 percent of GDP, compared with 11.1 percent for Switzerland. Since then, US spending has increased to around 18 percent of GDP. The average health spending among all OECD countries was just $3,453, less than half of US health care costs, and constituted an average 8.9 percent of GDP in the OECD countries as of 2013.

SO THE HEALTH crisis is stark enough. But what are its causes, and, even more important, what are its solutions?

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At the core of the crisis of health outcomes are the glaring economic, social, and political inequalities of the United States. The United States has the highest inequality of disposable income among high-income countries, and also the largest entrenched class of the poor and near-poor. All of America’s social-support systems — including health care, education, and the judicial system — are now clogged with human sorrows that would hardly exist in a more equal society: children who can’t read, young people without requisite job skills, households in legal woes unable to afford lawyers, and poor people in ill health bearing the disease burdens of poverty.

Low-income Americans are in bad health for two main reasons. First, their social circumstances lead to more stress, mental illness, substance abuse, obesity, environmental harms, and other poverty-related disease burdens, which in turn entrench their poverty. Second, by dint of their poverty, they eat less healthy diets; have weaker links with the health care system (for example, no family doctor); cannot afford medications; disproportionately have lives disrupted by prison terms; and enjoy less leisure time.

The sky-high costs of medicines and health services exacerbate the problem at every turn. The most authoritative recent study of America’s soaring health care costs is the 2012 report on Best Care at Lower Cost, by the federal government’s Institute of Medicine (now the National Academy of Medicine). That report found that the higher health care outlays in the United States — compared with Europe, Canada, Japan, and Australia — are due to the higher prices of health services, including drugs, hospital stays, outpatient visits, and medical procedures rather than to a greater use or higher quality of those services.

For example, the cost of a bypass operation in 2013 averaged $75,345 in the United States compared with $36,509 in Switzerland, and a CT scan averaged $896 in the United States compared with $432 in Switzerland. Inpatient drug prices (measured in 2010) were also far lower abroad than in the United States — roughly half in the UK, Canada, and Australia.

In other high-income countries, governments set the prices for health services in the course of negotiations with hospitals, doctors groups, and pharmaceutical companies. The government often covers the entire cost of health care out of tax revenues. Hospitals and doctors are usually reimbursed a fixed sum each year for each insured individual (called “capitation”) rather than on the basis of reimbursements for each procedure (“fee-for-service”). Capitation encourages the health system to focus on prevention as well as treatment, and to encourage health-promoting activities (like weight loss and exercise). And where other countries use fee-for-service, there is very often one price for a given service that applies for all providers and patients in a given region.

In the United States, the situation is different. America’s hospitals, provider groups, and pharmaceutical companies set their prices in a bewildering array of negotiations between the providers and health insurers, governments (federal, state, and city), and individual patients paying out of pocket. Most providers are remunerated by fee-for-service rather than capitation. The prices they charge vary widely by patient, even for the same procedures. There is no single price list. The providers charge what they can, depending on their market power. Some patients are covered by private health plans, and then prices are set between the providers and the health insurers. In other cases, the payer is government, and so the negotiations are with public agencies. In still other cases, the patient is uninsured. Often the health providers charge the most to the uninsured who pay out of pocket.

The health providers have considerable market power, deriving from four sources: patents on medicines and devices; few provider groups in any given geographical market; the unilateral disarmament of Medicare in negotiations; and limits on the supply of health care workers, including doctors and nondoctors.

CONSIDER DRUG PRICES and the role of patents. The US patent law grants an exclusive monopoly for 20 years, from date of filing, to the holder of a drug patent. This temporary monopoly enables the patent holder to raise retail prices far above production costs, ostensibly to give incentives for R&D. The problem is that the drug companies are using their monopoly pricing power to abusive extremes.

Gilead Sciences, for example, spent $11 billion in 2011 to purchase the patent for a wonder cure for hepatitis C from a small biotech company. Gilead paid the hefty sum of $11 billion, knowing that it would turn around and charge the outrageous price of $1,000 per pill, even though the medicine costs around $1 per pill to manufacture. Gilead is earning more than $11 billion in profits every single year, recouping its purchase price countless times over. Many Americans with hepatitis C, including our veterans, are sick and even dying because they can’t afford Gilead’s extortionate prices.

A second source of monopoly power over prices is that, in many regions, there are now only one or two major health care providers. The problem of monopoly power is getting worse as mergers and consolidations are reducing the number of major health providers in each region.

A third source of monopoly power is the fact that the 2003 federal law establishing Medicare Part D (covering prescription drugs) explicitly bars Medicare from negotiating with the drug companies. Gilead can set any price it wants without the federal government saying a word. This provision was stuck in the legislation literally in the middle of the night, by the pharmaceutical industry’s lobbyists, and reflects the fact that the health industry is one of the biggest funders of Congressional campaigns. In the 2016 election cycle, campaign contributions by individuals and companies in the health sector have totaled more than $200 million in support to candidates and PACs.

A fourth source of monopoly power results from various limits on the supply of health-sector personnel. In 2013, the United States graduated just 7.3 medical students per 100,000 people, compared with an OECD average of 11.5 per 100,000 and a high of 19.7 per 100,000 in Denmark. The United States has only 2.6 doctors per 1,000 people, compared with an OECD average of 3.3 per 1,000. The United States could also augment the health workforce by allowing properly trained and supervised nondoctors to take on an expanded range of roles at lower cost, a process known as “task shifting.”

Sky-high health care costs, combined with entrenched poverty and stagnant working-class incomes, are leading to devastating health outcomes. Recent research by Nobel laureate Angus Deaton and his coauthor, Ann Case, has shown that middle-aged working-class whites are now experiencing an unprecedented rise in mortality rates, not unlike the falling life expectancy that plagued middle-aged men in the Soviet Union in the years before its collapse. Rising death rates in the population signify a deep crisis in the social order, including the health system.

OBAMACARE INCREASED health care coverage but did not solve the crisis of sky-high prices, and may well have exacerbated it by adding government subsidies into a system marked by pervasive market power and lack of competition.

I therefore recommend the following policies to address America’s urgent health care crisis.

First, as I’ve suggested in previous articles in this series, America should adopt policies to reduce income inequalities, end the over-incarceration of the poor, empower workers, clean and green the environment, and raise the social status of working-class families. Over time, such measures would help to reverse the epidemics of drug abuse, mental illness, obesity, and other diseases exacerbated by poverty and low social status.

Second, America should move toward universal health care coverage through public financing, as in Canada and Europe, with health providers (both private and not-for-profit) supplying coverage on the basis of capitation rather than fee-for-service. Capitation would encourage and enable health providers to offer supportive services (nutrition counseling, social support, health advising) that help to prevent, treat, and manage chronic conditions such as cardiovascular disease and adult-onset diabetes.

Third, the government should move to a system of price ceilings for medicines under patent through rational guidelines that balance the incentives for R&D with drug affordability and access. Economists have long argued that today’s patent law does not do an adequate job of balancing the needed incentives for innovation with the assurance of access to affordable medicines. The situation became intolerable after the advent of Medicare Part D, with the government now spending vast sums for drugs and drug companies grossly abusing the system by setting outrageous markups on the cost of production.

None of this is a dream or a utopian vision. These reforms would simply put the United States on the path toward improved health care coverage, affordability, and outcomes already enjoyed by the citizens of Canada, Japan, and many countries in Europe.

Read more from Jeffrey D. Sachs:

Economic choices facing the United States: Why we need a new direction

Sustainable infrastructure after the Automobile Age

Smart machines and the future of jobs

The truth about trade

Jeffrey D. Sachs is University Professor and Director of the Center for Sustainable Development at Columbia University, and author of “The Age of Sustainable Development.”
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