Article 2 – The Plague of Myths: Myth 1 Healthcare Costs Too Much

Affordable Care Act Healthcare Myth

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We don't really have a healthcare system and its killing any reform.
We don’t really have a healthcare system and its killing any reform.

“This is the second of a series of articles that will be published over the coming days and weeks. The series of articles will define the problems, at a higher level, that we have in what we call our healthcare system, why they are important and how they have conspired to foil our various attempts to “fix” healthcare. Each article will encapsulate one, or more, related issues, describe the problem and its effect today, how it historically developed and describe the framework of the solution(s). The final article will summarize the solutions and describe their intrinsic benefits.
(If you would like a more detailed read you may go directly to the draft Whitepaper titled, HEALTHCARE REFORM 2.0: Beyond the Partisan Divide Lies Pragmatic Solutions currently version 1.1)”

List of Articles:

  1. Introduction to Healthcare reform: What’s next
  2. Article 1 – Introduction to the Real HealthCare System
  3. Article 2 – The Plague of Myths: Myth 1 Healthcare Costs Too Much
  4. Article 3 – The Plague of Myths: Myth 2 Healthcare, It’s Good for What Ails You!
  5. Article 4 – The Plague of Myths: Myth 3 We Can, and We Should, Live Forever!

The Plague of Myths

There are many myths that pervade our beliefs and therefore underlying assumption about our so called healthcare system. We believe that;

  • We have a healthcare system,
  • We believe that we already have, or are very near to having, cures for almost everything,
  • We believe what is good for us as individuals is good for the human species,
  • When it comes to healthcare we think that what we want is the same as what we need,
  • We either believe only government should have the role of providing care or we believe that government should have no role at all,
  • We believe that America can afford it – whatever it is,
  • We believe that Employer Sponsored Insurance has been a good thing,
  • We believe Co-Pays and Deductibles have helped lower costs and reduce consumption, and
  • We believe many, many others myths as well.
  • We also believe that American Healthcare costs too much!

Does American healthcare costs too much?

We believe that our healthcare system costs too much.  This forms the basis for many, if not all, of the assumptions we make about what is wrong with American healthcare.  It provides the justification for the historical vilification of most of the players in the system including; doctors, pharma, insurance companies, hospital systems, patients, etc.  It provides the basic assumptions that virtually any other system in the world is better than the American system in providing care, on almost any set of criteria, as long as cost is a part of the measure. It also sets the stage for why any solution simply must be a governmental solution because – in the generally held opinion – clearly the American free market system has let us down when it comes to healthcare. But is it really true that American Healthcare costs too much?
The question is predicated on what the real question, or questions, are actually asking.  When asking a person if something costs too much, most people will have one of two deliberative responses.  The first deliberative response is, “Yes, it costs too much!” The second deliberative response we may hear is, “Compared to what?”  The problem is that neither of these responses really have a true answer.  In the first deliberative case, when asked, everyone will respond that something costs too much, typically because, emotionally, we always want to pay less.  In the rare occurrence where there is a more rational real evaluative process at work – which is not as typical an occurrence as we may wish it were – this determination is mostly due to; it used to cost less – now it costs more, and therefore it costs too much.
In the second deliberative case, we apply a variety of measures, more often than not, to prove that it does, in fact, cost too much.  We innately carry a bias to find a reason that something is not giving us the value we seek.  This has been ingrained in us as consumers. It is further complicated for us in healthcare because the numbers that we use to determine how much care is costing us as individuals, or as a nation, are often wieldy inaccurate and unspecific. As individuals, we do not have real transparent and price certain information to form a judgment. We may know what we pay in premiums, we may know what we have to pay in deductibles, we may even know what we are supposed to pay in Co-Pays but we really do not know what the doctor is getting paid, unless we pay the bill ourselves.  Further, we often have no transparent mechanism to assess comparative value, nor do we have the ability to fully understand the other hidden costs that layer in the system driving up the true care costs. Some of the hidden charges show up in the price as rebates, some show up in fees that are assessed on insurers or providers, some show up in taxes that we pay, and some show up in raises we do not get because employers decided, or are forced to, put more money in benefits costs. Some of the costs we see, we understand, are due to cost shifting from government payment shortfalls to providers being passed back to private pay patients and insurance patients. We simply do not know how much hits us individually, nor what hits us nationally.  So when we ask the clarifying question “Does it cost too much, compared to what?” we will add qualifiers like, Compared to a single payer system, or to the governmental form they have in England, or France, or Germany.  Or, we may say compared to Medicare, or Medicaid, or Romney care in Massachusetts, or to some other idea.  The problem is they are not comparable for a variety of reasons. The whitepaper address many more of them than we will in this article.
Lest you think you are alone in the dark as a patient, neither providers, nor insurers, nor anyone else knows either.  We have evolved a false economic structure for our healthcare services over the years and now we have a system that is mechanically, and in other ways, driving costs higher each cycle, making the true cost of care less transparent, stimulating the need for more hidden self-predatory and self-propagating systems to fund these spiraling costs, and these systems are requiring that many charge more to offset the other spiraling costs. If we do not know what it costs in a real and true sense, then we cannot answer the prime question, “Does American healthcare cost too much?” This is regardless of which of the former deliberative paths; emotional or rational, we choose to apply to get an answer.

Do we really know how much America’s healthcare costs?

The short answer is, NO – we don’t. We just think we know what it costs because the government produces a combined healthcare spend number that is nationally reported.  But, does the number, that is reported, actually represent what we really pay for the healthcare we consume? You guessed it, NO – it doesn’t.
The real number is likely far less than what we is reported; but getting to the real number is very difficult.  Why is it so difficult?  Well that’s because of a number of factors. A few of them are;

  1. We do not collect consistent comparable data – it includes both actual reimbursements and invoiced prices.
  2. Much of the reimbursement data that is collected, is tainted by the false economic structure in place that both influences its price and affects the reporting
  3. Some of the data reflects what is charged at invoice; but what is typically paid to providers is a significantly smaller number – averaging 22 cents on the dollar invoiced – unless you are a self-pay patient.
  4. The numbers that are calculated based on what is reimbursed to providers for the service – actually paid, not invoiced – is tainted by a number of hidden and in some cases arbitrary calculations and mechanisms that drive up the reported reimbursement price as well.

False economy – false pricing

The whitepaper has many examples of items that obscure the true price and that have created a hidden disruptive system of back funded programs and self-predatory and self-propagating pricing. Here we will discuss one of the easier examples.
Rebates exist in almost every industry and in most segments of our economy. Typically, they have little effect – other than fooling us into believing we are getting some kind of great deal and that we need to purchase today to take advantage of the saving.  In actuality, they are nothing more than a simple artifice of marketing to get us to buy now and believe we have just gotten a great buy. Of course, they are an illusion.  Manufacturers follow the practice of, “Mark up – to mark down.”  What we pay for the product is what they planned for us to pay all along.  We got the very same deal we would have gotten if rebates did not exist and in the end nothing is harmed – except our ego.
Healthcare prices invoiced are historically highly inflated to compensate for a number of other hidden charges and do not reflect a fraction of what is actually paid. The problem is there is no real understanding of what is finally paid for any of these services.  As stated earlier, invoiced rates receive actual payments of only about 22 cents on the dollar and sometimes much less.  Even the recorded reimbursement rates are inaccurate due to numerous mechanisms in the current systems. The following is just one example and this shows the effect of rebates in the nation’s pharmaceutical system’s real cost and pricing.  Simply, many levels along the supply chain get money back from pharmaceutical companies based on the volume that they purchase in a given period. Effectively, they pay more for the product at the time of sale but if they reach a certain volume of purchases, they get money back from the manufacturer. These rebates flow back to pharmacies, Pharmaceutical distributors, hospitals and others often months after the actual purchase, the dispensing and the sale of the product.  There are complicated formulas that account for how much money goes back into the supply chain post purchase.  In itself, this obscures what is really paid into the system for the product.  Rebates in true consumer market retail systems are not a problem because the price we consumers pay is the price we accept.  But when the payment is made via a government program and not based on our own discretion; and when the government is mandating rebates back to itself and then flowing the rebates to pay for the services that generated the rebate, these rebates become a big problem!  Lest we blame Pharma for this, as some method to hide pricing and make hidden profits, this is not the case.  Pharmaceutical manufactures did not create this system – our government did. The biggest players in pharmaceutical rebates are the federal and state governments who demand rebates from Pharma for the drugs their benefits programs proscribe to their program participants.

This example is of the California AIDS Drug Assistance Program (ADAP).  Spending about $500 million per year for drugs for HIV/AIDS patients that meet their eligibility criteria, since California is paying directly for the services you might assume that the true cost of the medications is the $500 million that California spent for the drugs. But, you would be wildly wrong! The $500 million is paid from three main sources.  About 50 percent of the funding is provided to California through the federal Ryan White Care Act program – a significant portion of these funds come to the federal government from mandatory pharmaceutical rebates paid by the manufacturing company to the Center for Medicare and Medicaid Services (CMS). This government mandated rebate program assesses a rebate ranging from 17 percent to no more than 100 percent of the Average Manufacturer Price (AMP). These rebates flow back to CMS months after the provision of the medication to the program participant, purchase and payment to the pharmacy that dispensed them and the subsequent processing of the claims to the state.  Of the remaining 50 percent of the $500 million, this is provided by California.  Slightly less than ½ of these funds are derived from the CA general budget (about $120 million from state taxes) the other, slightly more than ½, come from a “Special” Fund in the CA budget that is where similarly mandated rebates are paid to California by pharmaceutical companies that provide medications to participants in the CA ADAP program. Somewhere between 1/3 and ½ of the funds that are counted as payment for these medications are just artificially inflated pricing that is collected at the time of payment, flows to the manufacturer and then flows back to the state to begin the false economic cycle all over again. So, in the case of California, the true cost of the drugs provided by the Cal ADAP program to participants is at least 1/3 less than the reported $500 million number.

Similar governmental backflow funding mechanisms that generate false cost data is seen in a number of the Affordable Care Act fee structures.  When fees are assessed on the costs of premiums, and are then collected and used to pay for the subsidies in premiums you purchase, you have a similar self-propagating and expanding cost driver.   There are many, many of these structures in our current healthcare system and the ACA and other proposed legislative fixes, have not only NOT fixed them they are inadvertently adding many more layers too them. So we just do not know what we pay for healthcare in America either as an individual patient or as a nation! It’s that simple. So if we really do not know these numbers how can we determine if our system is worse than some other system? Particularly when part of the question we are asking has our inflated cost in the mix?

Is the American total cost of care number an “apples to apples” comparison to other countries?

So what is the current projected total estimated cost of healthcare for our current year, 2014? It is $3.8 trillion.  Whew, it hurts one’s head just to think about that number. Particularly, when you remember that there is only an estimated $17 trillion of currency in circulation – this is from the most generous estimates.  In 2009, we reported that we spent only $2.9 trillion.  As we described above, these are not true and valid numbers.  These are just the numbers we’ve calculated.  We have been calculating these numbers for a long time but that makes them no more accurate.  In fact, we have made a number of substantive changes to the factors that influence pricing, as have been partially described above, and as a result, it is more than likely that this number is inflated by as much as 1/4 to 1/3, or perhaps even more. The effect of the self-predatory and self-propagating factors, like mandated rebates and penalties, as well as the false structure of massively inflated invoice prices that do not directly relate to actual reimbursements, all contribute to this false economic and false understanding of what we are really spending. The problem is not just that we are comparing non-real numbers, there is at least one other problem. We do not count our system like most of the others do either.
An issue that exists in comparing the U.S. healthcare spend, let’s say against England or France, is that America counts all healthcare including Medicare, Medicaid, private pay, insurance, self-insurance, military and retail care through all channels of care. We do not have one system, we have many, and we count all of them indiscriminately and as stated, inaccurately.  Most countries with central governmental healthcare, are only counting the official governmental healthcare system numbers.  They often do not recognize that there are also private choice based systems for people that want to buy care and can afford to purchase directly from providers outside of the governmental system. These national numbers are often significantly under-reported when compared to our own.
So when we see comparisons of the cost of care in America, as compared to other countries, we are never looking at apple to apples comparisons. We must realize that the number we claim we actually spent, is not a true and accurate number. Taking all these corrupting factors into consideration, and eliminating the partisan bias on either side, it is highly likely that the U.S. healthcare system will fall in the upper third to middle of other nations as compared by cost, outcome and efficiencies. What is unequivocal is the U.S. ranks at the highest percentile for options and choice.
Once again, one of the key assumptions that drives our opinion of America’s healthcare system is that other nations measure their healthcare costs as we do, and what they report is reflective of the same things we count in America, but this is an invalid assumption as well. So when we look at comparative costs for procedures between any other country and ourselves, we are really at a loss to make an effective measure due to the problems in how we create costs and how we count the costs. This is addressable, and relatively easily fixable. And, it is a fix that systemically will combine with the other needed solutions to solve some of the other fundamental and systemic problems in our current healthcare system. They will combine in an elegant way to create a simpler and more effective, consistent, and fair approach and will solve for the goals outlined in Article 1: Introduction to the Real Healthcare System.
Another thing that is driving up our costs, are our own expectations of the care we should receive, its real efficacy, the extent of the care, and modern medicines true ability to provide to us what it is that we believe they can deliver.


In order to solve for these problems, we must develop an integrated solution that provides the necessary system architecture and systemic controls to remove the need for these extraneous and obfuscating price and funding systems.  We must set up a system where cost shifting cannot occur.  We must assure that there is no mechanism that can self-propagate and become self-predatory.
The solution for this set of problems will remove rebates and other back funding mechanisms, and will bifurcate the market for the basic care we need while delivering through a separate market the optional care we want.  One market will be incentivized to provide all the basic care we need efficiently, cost effectively and efficaciously to every American regardless of income or means equally and fairly. The other market will be designed to deliver choice to obtain the care we desire and want with a range of options of price and value based services.
These two markets should be tightly integrated and managed through a single point of administration that will allow for a truly patient centered system incorporating easy sourcing and access, transparent pricing, price certainty, and portability as well as full coordination of care and benefits across all available sources.
This type of system can be created incorporating most of the current infrastructure. It will significantly simply many of the practical problems that plague, insurers, providers, patients and third party administrators.  It will significantly lower costs, free resources, lower liability, reduce duplication of services, reduce fraud and provide easier access. Finally, it is designed to provide full portability, transparency and price certainty so that America and Americans can make informed and accurate decisions as to the cost and resulting value for the services they receive and to effectively compare cost and performance between services, providers, institutions, methods and other nations.

Coming next

Article 3 – The Plague of Myths – Myth 2, Healthcare, It’s Good for What Ails You!

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