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On health-care prices, Obama goes where Obamacare doesn't

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President Barack Obama thinks it makes sense to give health-care consumers and insurers more power to bargain for better prices, especially on drugs -- a wonky sounding idea that will make liberals cheer.

In an interview with Vox, Ezra Klein asked Obama whether America should have "private insurers band together with Medicare, with Medicaid, to jointly negotiate prices." Obama answered by saying: "I think that moving in the direction where consumers and others can have more power in the marketplace, particularly when it comes to drugs, makes a lot of sense."

The answer doesn't include the words "all-payer rate setting," but that's basically what it's about: the idea is to let many insurers combine to form a single entity that can negotiate better prices and shift market power away from drug makers and providers.

Obama didn't go so far as to endorse a true all-payer system, which many liberals view as the next best thing to single-payer. But even "moving in the direction," as Obama put it, of greater negotiating, would be a huge change in America.

This might be the next great fight over health reform. As angry as the battle over the Affordable Care Act was, the law left the basic mechanics of America's health-care sector largely untouched. But if Obamacare becomes a platform for all-payer rate setting — which is already true in Maryland — it will become what conservatives have long feared and liberals have long hoped: a huge step in the direction of single-payer health care.

Tackling what Obamacare didn't

obama signs aca

President Obama signs the Affordable Care Act in 2010 (Win McNamee / Getty News Images)

The Affordable Care Act expanded health insurance to millions of Americans. But one thing the law didn't do was tackle the unit prices of health care here, which are much higher here than abroad. The problem is especially acute in an area that Obama singled out: drug prices. Americans currently pay way more for prescription medication than any other advanced economy. Drugs regularly cost twice or three times as much as they do in Canada or Britain, even for the same medication, in the same dose, produced by the same manufacturer. When a new Hepatitis C cure came on the market in late 2013, it sold for $84,000 in the United States — but $55,000 in the United Kingdom. Similarly, drugs for multiple sclerosis or leukemia see the United States pay much more.

If insurers could band together, as they do in Germany and Japan, they would likely be able to demand lower prices from American hospitals. They'd be buying in bulk and promising a steady stream of customers — and asking for big discounts in return.

"The main effect would be reducing the high prices that hospitals charge in very concentrated markets," says Paul Ginsburg, a health economist at the University of Southern California.

This is this the core advantage of single-payer, too: when the government negotiates on behalf of all its citizens, it has more bargaining clout with doctors and hospitals. It also reduces administrative costs. When every procedure has a set price, a billing clerk doesn't have to look up the rate for Insurance Plan A versus Insurance Plan B.

"[All-payer rate setting] has everything except the government-run plan," says Mark Pauly, a health economist at University of Pennsylvania's Wharton School of Business. "They're using a plan like Blue Cross as their agent. "For all intents and purposes, it would look the same to consumers," he says of comparing all-payer and single-payer plans.

A Democrat's dream — and Republican's nightmare

To be sure, America is still a far ways off from an all-payer system. While Obama signaled support for the underlying concept of the system in his interview with Vox, putting such a law into place would require Congress passing another major piece of legislation — something that legislators who remember the vicious fight over passing in Obamacare five years ago are extremely unlikely to tackle.

This is, more than anything, an aspirational position, perhaps one that the next Democratic president could pursue as a way to build upon the Affordable Care Act's foundation. But while Obamacare was and is a wildly controversial law, compared to all-payer rate setting, it's a modest change in how the heath-care market works.


Allen West

Allen West has argued Obamacare opens the door to single-payer health care. (Bill Taylor / Getty News Images)

Ever since Obamacare took effect, Republicans have warned of mission creep: that a law bringing more government regulation to health care would eventually morph into single-payer. Former Rep. Allen West (R-Fla.) argued in a 2014 NewsMax editorial that Obamacare was "the perfect setup for a government single-payer system to swoop in and rescue the nation — Medicaid for everyone! Checkmate!"

One worry conservatives often voice with single-payer systems is that they stifle innovation. The extra money Americans spend on health care, the argument goes, gets funneled back into research and ultimately leads to new drugs and devices."Innovation has always been a challenge for these systems," says Ken Thorpe, a health economist at Emory University.

But supporters of all-payer systems argue that the trade-off can ultimately be worth it. For one, they’re not convinced that the extra spending actually supports innovation when they look at pharmaceutical companies’ profit margins, which tend to be in the double-digits. Second, they argue that Americans shouldn’t get stuck with pharmaceutical companies’ research and development bills exclusively, when their products go on to sell across the globe.

"How do we maintain insurance financing if everyone takes this pricing approach?," says John Rother, who leads the the Campaign for Sustainable Rx Pricing. "We end up sinking the ship. We want innovation, but to continue loading these high drug benefits onto premiums isn't going to work."