Explaining why Americans pay so much more for health care than anyone else is really quite easy: Americans are charged higher prices for health care than anyone else.
Here are 15 charts proving the point, but in case you don't want to flip through those graphs (side note: what's wrong with you?), some examples from average pricing data reported by insurers in different countries:
1) A knee replacement costs $25,398 in America and $12,589 in the Netherlands.
2) A standard delivery costs $10,002 in America and $2,251 in Spain.
3) An MRI costs $1,145 in America and $138 in Switzerland.
But those are average prices, and so they hide another quirk of the American health system: the prices different Americans pay vary wildly depending on where they are, who they are, whether they're insured, who they're insured by, and which hospital the ambulance took them to. Cruelly, the uninsured are often charged the highest prices, because if you're too poor to afford insurance, you're also too poor to fight back against price gouging.
None of this makes even a little bit of sense. But Medicare could help fix it.
The 125 percent solution
In Health Affairs, Jonathan Skinner, Elliot Fisher and James Weinstein note data from Castlight Health showing that the price tag on one particular cholesterol test can range from $15 to $343 — and that's just within the city of Dallas, Texas.
And before anyone yells "Free Market!", these prices are rarely, if ever, published, and often they're not even the actual price people pay. If markets are going to work well, both buyers and sellers need a lot of information about how much things cost and how good they are. In health care, buyers are denied basically all of that information, and they're occasionally unconscious when the transaction is being handled. This is not what a functioning market looks like.
But there are exceptions to America's used-car dealership of a health-care system. One of them is Medicare. The way Medicare works — which is the way the health systems in pretty much every other country work — is that it tells hospitals and doctors what it's willing to pay for various services and then they decide whether to accept Medicare or reject it. It's a take-it-or-leave-it offer. Almost all of them take it. More than 90 percent of doctors accepted new Medicare patients in 2012 — a higher number, even, than accepted new patients on private insurance. The result is that Medicare beneficiaries pay much lower, and much more predictable, prices than people with private insurance.
"In the long run," write Skinner, Fisher, and Weinstein, "we need to establish a more transparent system where consumers can choose easily based on reliable quality and price measures." But in the short term, they suggest a simpler solution: why not cap all prices at 125 percent what Medicare pays?
The federal Medicare program has in place a complete system of prices for every procedure and treatment. It's not perfect, but it is uniform across regions, with a cost-of-living adjustment that pays more in expensive cities and less in rural areas. If every patient and every insurance company always had the option of paying 125 percent of the Medicare price for any service, we would effectively cap the worst of the price spikes. No longer would the tourist checked out at the ER for heat stroke be clobbered with a sky-high bill. Nor would the uninsured single mother be charged 10 times the best price for her child's asthma care. This is not just another government regulation, but instead a protection plan that shields consumers from excessive market power.
A public option, but privately run
One way to think about what this proposal would and would not do is to think about the public-option debate. The argument over the public option was slippery and frustrating because there were really two different public options — a strong and a weak one — and both supporters and detractors switched which one they were talking about constantly.
The strong public option would have paid Medicare rates for services and, in doing, save more than $100 billion over 10 years. This is the public option that supporters were talking about when they said the public option would save huge amounts of money and possibly provide a bridge to single payer. It was also the public option that detractors were talking about when they said the public option was a backdoor plan to implement single payer and it would put many private insurers out of businesses. This public option never came anywhere close to becoming law.
The other public option was just a normal insurer that was run by the government. It would pay prices similar to what the other insurers paid, and it wasn't projected to save much money, sign up many people, or pose much of a threat to traditional insurers. This public option almost did become law.
The key point here is that the game changer isn't whether the insurer is public but whether it pays the same low prices as Medicare. Skinner, Fisher, and Weinstein are taking that insight to its logical conclusion: why not just give those prices to private insurers, too?
Well, one answer is that the entire health-care system is organized around being able to charge these high prices. If everyone switched to paying Medicare rates overnight, you would see a wave of hospitals closing and device manufacturers going bankrupt. The system can't take that much change, that fast.
So Skinner, Fisher, and Weinstein want to cap payments at 125 percent of what Medicare pays. This doesn't necessarily bring prices down so much as it brings the variation in prices down. This is a plan to help the people who end up getting truly gouged — it will mean an end, for instance, to uninsured patients being charged 300 percent of what Medicare pays for an appendectomy.
The health industry would freak out, of course, because once prices are capped at 125 percent of Medicare's rates, they know it's a small step to bring them down to 123 percent, or 117 percent, or 115 percent. The 125 percent plan would be a step towards All Payer Rate Setting — which is, more or less, a way of merging the savings of single-payer system with a lot of private insurers.
But that's a good thing. Either it'll force the health-care sector to get serious about setting up that hoped-for "more transparent system where consumers can choose easily based on reliable quality and price measures," or it'll show that that system isn't possible, and we should just do what every other industrialized country does and have the government set health-care prices.
(By the way, have you read Sarah Kliff's "Eight facts that explain what's wrong with American health care"? If you haven't, you should.)