High Health Care Costs Emanate From Business, Not Government

09/23/2010 08:42 am ET | Updated May 25, 2011

At one of the town hall meetings that preceded the passage of the Affordable Care Act (ACA), President Barack Obama read an exhortation from a woman enrolled in Medicare: "I don't want government-run health care. I don't want socialized medicine. And don't touch my Medicare.'" This woman should perhaps now count herself fortunate that the ACA is law. She will be eligible for preventive health care with no out-of-pocket expenses as part of an ACA program that will save tens of thousands of lives per year and generate huge health care savings.

Long before the passage of the law, the government was highly involved in the US health care system. In 2008 public expenditure on health care was $3,507 for every man, woman and child in the U.S., and private expenditure was $4,031. The United States spends far more on health care than any other country, but the main discrepancy is in private spending, not public spending. Compared with France for example, in 2008 US public expenditures per capita were 22 percent higher, but private expenditures per capita were 391 percent higher. Yet, in contrast to France and other European nations which provide universal medical coverage, about 47 million Americans - some 16 percent of the US population - were uninsured in 2008.

The United States clearly has a problem of out-of-control health care costs. The problem resides, however, in the business component of costs, not in the government component. What Americans should be worrying about is how to regulate the businesses that get rich when we get sick.

The ACA takes steps to limit the boundless profiteering that has become customary in the U.S. health care system. By tackling key sources of waste, fraud and abuse, the law starts us on a road to cost containment. Here are some examples:

Overcharging for health insurance. The leading health insurers in the United States deliver low-quality, high-cost coverage. The biggest among them use virtually all of their enormous profits to do enormous stock repurchases. That means that a significant percentage of an insurance premium goes simply to boost the insurer's stock price, which in turn jacks up executive pay. During the past decade four of the biggest insurers -- UnitedHealth Group, WellPoint, Aetna, and Cigna -- did combined stock buybacks of $62.9 billion, more than their combined net income.

States have two new tools to prevent health plans from gouging consumers. First, 46 states have received grants from the US Department of Health and Human Services to investigate premium rate increases. This funding will give states the resources to review the complicated actuarial explanations filed by insurance companies and to judge whether premium increases are justified. In addition, plans will now be required to devote a minimum percentage of their premium revenue to medical care instead of administration, executive salaries, profits, lobbying and administrative waste. Plans will owe their customers rebates if they fail to spend at least 80 percent (individual and small group) or 85 percent (large group) of premium dollars on medical expenses.

Over-investment in expensive equipment.
The U.S. has about 26 magnetic resonance imaging (MRI) units per million population, more than double the average of 11 units in all economically advanced nations. Japan has 43 units per million population, but under the country's single-payer insurance system, the cost of a scanning session in Japan is about one-tenth the typical charge in the United States. The ACA addresses this problem by adding a new sales tax on the purchase of expensive equipment and changing the formula that Medicare uses to pay for imaging services in order to avoid overpayment. In addition, there are new disclosure requirements so patients will know if their doctor is rewarded financially for prescribing a particular imaging test.

Overcharging for prescription drugs. The prices that Americans pay for drugs are about double the prices in other advanced countries. Since the 1980s, major pharmaceutical companies have successfully argued in Congress against the regulation of drug prices, claiming that high profits are needed to fund research and development. Yet a large portion of the profits of these companies is devoted to repurchasing their stock. For the decade 2000-2009, Pfizer bought back $50.6 billion, equivalent to 65 percent of its profits and 66 percent of its research spending, and Amgen repurchased $25.8 billion, about equal to its net income and R&D.

While we await regulation to confront this troubling inconsistency, the ACA takes steps to reduce the cost of drugs. Already this year more than one million Medicare beneficiaries have received $250 checks to help offset drug costs after falling into the prescription drug donut hole, and starting next year, seniors will get a 50 percent discount on brand name drugs when they enter the donut hole. The ACA also expands access to a prescription drug discount program for children's hospitals and other community providers.

At the root of the high cost of health care in the United States is a highly financialized business system. The ACA is an important step toward significant health reform. Until we control the behavior of business corporations in the health care sector, as parts of the law begin to do, Americans will continue to grapple with extraordinarily high health care costs.