The Path Dependency of American Health Care

Thomas Miller compares the possibilities of containing present health care spending with restraining future health care spending.  He maintains that managing and reducing future health care demand is more likely to be accomplished than controlling current health care demands:

https://www.civitasinstitute.org/research/the-path-dependency-of-american-health-care

The Path Dependency of American Health Care
By Thomas Miller - January 29, 2025

Summary

The more fruitful path to limiting health spending involves facilitating changes in future demand rather than imposing artificial and less sustainable limits on current appetites.

Health care politics have two longstanding verities: most, if not all, problems must be someone else’s fault, and private health insurers are most likely to be blamed. The momentary mass media frenzy over the December 4 killing of UnitedHealthCare chief executive Brian Thompson retriggered the usual instincts to repurpose a criminal tragedy into recycled political messages. But if we genuinely want better solutions, we will have to ask ourselves——better questions about incentives and responsibilities.

A lone gunman assassinating a health care executive should be primarily a criminal justice and mental health matter. however, unleashed another round of knee-jerk recriminations over UnitedHealthCare and other major health insurance companies performance and reputation to accompany it. Advocates of further political control over health care seemed eager to focus on how private insurers’ alleged misdeeds could have triggered such a violent reprisal. Although to be fair, they continue to encounter a “target-rich” environment in most health care coverage operations.

U.S. health care costs too much. Its administrative burdens and paperwork do not come close to passing any cost-benefit calculation. Health care spending remains oriented toward repairing expensive, back-end, acute, and chronic conditions, rather than fostering and maintaining better health over longer life cycles. Operational control over care delivery continues to become more consolidated and less accountable to patients. We suffer from substantial equity and efficiency shortcomings. Everyone seems unhappy with someone else. Health insurers are often at the circular firing squad’s center—we can’t live with them, but we cannot die without them either.

Well, not even your humble health policy researcher can solve this mess with facile nostrums and self-satisfying rhetoric in a few short paragraphs. We have been here before (see, for example, the late 1990s’ Managed Care Backlash. And we will again return, often to our own respective sets of simplified slogans. At best, limited, incremental moves that disappoint will follow unless and until we reexamine why the immediate future keeps looking like the recent past.

Let’s consider a few basics to start with. We ask a lot of private insurers as third-party intermediaries. Government programs subsidize private health care coverage in various forms. They pay most, if not all, of the costs of entitlement programs like Medicare and Medicaid. But private health care insurers, under contracts with private employers and individuals or with government program administrators, primarily handle the actual work of monitoring, approving, and executing health care providers’ payments. They also handle most of the work involved in assembling and maintaining health care networks, beneficiary communicating, and ensuring compliance with an ever-mounting list of government rules and regulations, including quality measurement, risk adjustment, and whatever contradictory momentary impulses stir policymakers.

Health risk management scale economies can sometimes be exaggerated beyond more modest thresholds, but the largest insurance organizations are better equipped to handle regulatory compliance’s baseline burdens. We may care less about whether insurers do these jobs well than we do if “someone” is getting them done. And, at least occasionally, someone has to say “no” to even more health care spending, particularly when “other people’s money” finances it.

But the price of outsourcing these tasks to private insurers, instead of paying for them more visibly on-budget and with government personnel (let alone by ourselves!), includes biasing our health care system toward much larger intermediaries and less competition. Of course, health insurers’ incentives to get larger and acquire smaller competitors go beyond managing compliance costs. They include the urge to gain more leverage in reimbursement negotiations with other payers and providers. With ever-growing opportunities to capture more of the expanding health care money, gaining extra advantages through politics rather than market performance often seems to be the most direct route.

Health care and health insurance involve some of the U.S. economy’s most highly regulated and publicly subsidized commercial activities, so it’s little surprise that its business leaders pay greater attention to lobbying public officials than to serving their less consequential customers. Officeholders receive reciprocal benefits that extend well beyond financial support. They get to “blame” insurers for much of the health care system’s wrongs instead of taking responsibility for their policy mistakes.

One of the hidden reasons behind the U.S.’s complex and opaque “mixed” public-private health care system is that private insurers get well-compensated to manage operations somewhat more efficiently or at least rationally than government bureaucrats, while they nonetheless remain the primary default option for blame catching. Our ambivalence over rationing medical services solely by money or by politics (while wishing we could avoid both) further sustains our public-private straddle.

We do not have to lionize private insurers’ capitalistic magic like. Their top executives are just responding to the politicized markets’ dominant incentives. And that means they will push to capture more of the revenue sitting on the table, even if it comes increasingly through political payers rather than private ones, despite the former’s other attached costs and burdens. The present and future health care coverage “growth” side is clearly on the market’s public program portion (Medicare Advantage, Medicaid managed care), which strong demographic and economic forces propel. Hence, it is just “good business” to pay more attention to managing political risks to gain competitive advantages. It’s sad but inevitable that more successful private insurers “compete” by exploiting loopholes in quality ratings, risk profiles, reimbursement differentials, surprise billing, pricing transparency, and covered services’ calculations, while defending increased barriers to new entrants to the market.

One could try to exaggerate the marginal effects the Affordable Care Act’s coverage expansions of the last fifteen years add to this calculus, but I won’t attempt that here. Growing health care sector consolidation, third-party payment, and excessive regulatory burdens began decades earlier before the A.C.A. added on a few extra layers as the price of capturing larger shares of an expanded market. The Biden administration “succeeded” in raising A.C.A. subsidies enough to make Obamacare’s out-of-pocket premiums’ marginal cost close enough to zero to add reluctant customers to the program’s rolls—first through Medicaid and later through the A.C.A.’s individual market plans—despite the coverage and care quality it delivered.

American health care politics remains mired in inertia, path dependence, limited time horizons and attention spans, time inconsistency, interest group politics, diversionary rhetoric, and dysfunctional governance. But rather than hope for the status quo’s sudden miraculous transformation through placing more bets on the usual suspects and the same playbook, we might consider changing what we ask of ourselves and our health care arrangements.

Most political engagement’s underlying motivation is still the hope of altering through government action what unregulated competitive mechanisms and personal choices might otherwise produce. Public policies promote the chance to acquire winning lottery tickets offering greater health care services and product availability (subsidized by third parties), rather than better assurances of those resources being delivered and used more productively. The underlying rationale for most government health care coverage and services mandates and related pricing and delivery rules is to ensure that people spend more collectively than they would on their own as individuals.

The more fruitful path to limiting health spending involves facilitating changes in future demand rather than imposing artificial and less sustainable limits on current appetites. Health care spending’s future trajectory will be lowered in two ways. First, government officials will finally prefer to spend more on other things or want to keep total tax and borrowing rates down. Second, private individuals will become more willing to redirect marginal dollars away from health care service purchases and instead buy something else that they want more. Lessening the pricing distortions of subsidies, regulation, and information suppression; bypassing or eliminating funding silos; and decentralizing spending-allocation decisions can strengthen shifts in private and public demand-side signals.

We may remain rightfully skeptical that insurers but also health care providers, government program administrators, or employers will carry out our wishes and look after our best interests. But we also must trust ourselves to take a larger role in the medical decision-making space as patients and consumers and resist reneging on longer term commitments when our foreseeable circumstances change. Do we really want accountable alternatives to third-party payment and passively delegated decision making? Until we insist on choosing more faithful agents who deliver better measurable probabilities of improved health outcomes from any health care dollar input amount, we will remain at the bottom of the health system’s resource-allocation food chain.

Two of the past century’s comedy icons once hosted popular 1950s television game shows that framed these issues: “Who Do You Trust” (Johnny Carson) and “You Bet Your Life” (Groucho Marx). But if you consider saying some less-magical words, better health luck may come down instead.

Thomas Miller is a senior fellow at the American Enterprise Institute (AEI), where he studies health care policy. He is the coauthor of the bestseller Why ObamaCare is Wrong for America: How the New Health Care Law Drives Up Costs, Puts Government in Charge of Your Decisions, and Threatens Your Constitutional Rights (HarperCollins, 2011), the first in-depth examination of the Affordable Care Act.