Health-Care Reform After Obamacare

The Debate We Are Not Having

Of all the pressures that have built on the American family since the 1960s, few have been as consequential as the relentlessly rising yet still largely hidden cost of health care. If it seems like families a generation ago had a much easier time affording the cost of children and the trappings of a middle-class lifestyle, here is one large reason why: money and time that could once go to other life purposes, including to cover the forgone wages of those who stayed home and invested more time with their children, today must be devoted to covering the health-care sector’s rising tax on American families.

One way to see how this is so is to consider the dramatic increase in the numbers of hours that family breadwinners must today work in order to earn enough to cover the mounting cost of health care. In 1964, health-care spending was still an incidental cost in most family budgets. It amounted to just $197 per person per year. Given prevailing wages at the time, this meant that with a mere 78 hours of labor (or by the end of the second work week in January, for those working full-time), the average nonsupervisory worker earned enough to cover the per capita cost of health care.

But since then, year after year, health care costs have risen relentlessly faster than have both individual and family incomes. As a result, by 2012, a typical worker had to put in 452 hours to cover the average per capita burden of medical expenses, which by then had risen to more than $8,915. Put another way, it was not until nearly March of that year before the typical American working a 40-hour week earned enough to pay the health-care sector’s growing claim on his or her output.[1]

Americans covered by employer-sponsored health insurance plans (and most still are) often do not realize how deeply health-care costs are eroding their standard of living because they imagine that their employers are picking up much of the tab. But this is an illusion. In the typical pattern, employers have covered the mounting cost of health care premiums by reducing or holding the line on other forms of compensation. This dynamic largely explains the paradox of how the productivity of American workers can go up year after year but wages remain stagnant. In effect, most of the gains from our working longer and smarter have gone to pay for the inflating cost of health care.

Rising Costs: The Effect on Families

This year, the total annual cost of health care for a typical family of four covered by a typical employer-sponsored plan reached $24,671, according to data collected by the actuarial research firm Milliman. Such a family will typically pay more than $10,000 of this cost directly out of its own pockets though payroll deductions, co-payment, and deductibles. The rest it will pay indirectly in the form of forgone wages and other forms of compensations. The combined financial burden is roughly equivalent to the cost of buying, and then junking, a brand new Honda Accord LX every year.[2]

Here is another way to view the magnitude of the damage that health-
care costs are inflicting on the balance sheets of even families fortunate enough to have group health insurance. Median income for a family of four in the United States today is a little more than $80,000.[3] If such a family is paying north of $24,000 a year in direct and indirect health-care costs, that is equivalent to a payroll tax of 30 percent. How does this compare with the health-care burden such families faced in the past? Health-care costs for a family of four covered by health insurance have nearly doubled since 2001 as a percentage of family income. This is as if, starting during the first year of the George W. Bush administration, the government had imposed a new payroll tax on families that rose from 17.9 percent in 2002 to 30 percent today.

If the government had literally imposed a tax of such dimensions on American families, would anyone be surprised to see millions fall behind on their debts or lose their homes to foreclosures? Yet inflating health-care costs have imposed a financial hit on American families of equivalent size.

Sadly, passage of the Affordable Care Act has not reversed these trends. To be sure, “Obamacare” has made health-care insurance more affordable for those poor enough to receive direct premium subsidies or those who qualify for expanded Medicaid coverage. It has also ended price discrimination by insurers against people with preexisting conditions. Through its mandate requiring uncovered individuals to purchase health insurance, it has, as least on paper, reduced the problem of adverse selection in the markets for individual health insurance by reducing the numbers of people who buy policies only when they believe they are likely to become sick.

It is also true that Obamacare did not create the instant burst of hyperinflation in medical cost that many of its critics predicted—and that at least in nominal terms, rates of health-care inflation have moderated in recent years. But for the broad, struggling middle class, the vast majority of whom receive coverage through group insurance, and particularly for young middle-class families, the burden of health-care costs is as large as ever and becoming even less affordable fast.

One reason is that the cost of health care has by now grown so gigantic that even when it increases by a smaller percentage amount than in the past, this translates into an absolute increase in health-care costs that is huge, and for most families, unsustainable. This year, health care costs for a typical insured family of four increased by a “mere” 5.4 percent, but since such families were already paying $23,215 for health care in 2014, that percentage change amounted to an absolute hit on the family balance sheet of another $1,400.

At the same time, health-care costs continue to grow much faster than either individual or family income. This is particularly true for younger families. The median income among families headed by someone under 35 was just $35,500 in 2013. Adjusted for changes in the Consumer Price Index, that is nearly 20 percent below what young families earned in 2001.[4] Yet even as today’s younger families earn far less real income than did their counterparts 15 years ago, they face health-care costs that have risen nearly 20 percentage points more than general inflation.[5] Relentless increases in health-care costs combined with the dramatic general downward mobility of America’s younger cohorts helps to explain why, despite a massive increase in Medicaid spending and insurance premium subsidies offered under the ACA, a recent Commonwealth Fund survey finds that a higher share of Americans (35 percent) now report difficulties in paying medical bills or had medical debt than in 2005.[6]

The outlook going forward is also grim. According to recent reporting by the New York Times, health insurance companies around the country are seeking rate increases of 20-40 percent or more in 2016, citing the unexpectedly high cost of their new customers covered under the ACA.[7] As a nation, we have only just begun to confront the true dimensions of the health-care crisis. And worse, public debate over health care continues, on both the Left and Right, to rest largely on false premises and to pose false choices.

Waste on a Grand Scale

In popular understanding, rising health-care spending is often viewed as an inevitable consequence of advances in medical technology, increasing longevity, expanded access, and other mostly positive factors. Many people also point to profiteering by health insurers, or to needless administrative costs, or to patients demanding treatments they do not need. Yet while all these factors play a role in driving up health-care costs, the mounting drain imposed by the health-care sector on the rest of the economy comes mostly from its inflated prices, low productivity, and high volumes of unnecessary surgeries, redundant tests, and other profit maximizing behaviors among increasingly monopolistic health-care providers.

Put another way, a huge percentage of U.S. health-care spending pays for waste. One measure of the extent of this waste comes from the work of the Dartmouth Atlas of Health Care project, which estimates that at least 20-30 percent of U.S. health-care spending goes for care that has no benefit to patients.[8]

To derive this estimate, Dartmouth researchers start by comparing differences in the intensity of treatments equally sick patients receive in different parts of the country. For example, the average number of doctor visits for a Medicare patient in Miami during the last two years of his or her life is 106. But in Minneapolis, among Medicare patients suffering the same chronic conditions, the average number of doctor visits during the last two years of life is only 26. Yet in both cities, all these equally sick patients are equally dead at the end of two years.

What are the implications of such a finding? The much higher volume and intensity of medicine as it is practiced in Miami as compared to Minneapolis may benefit some patients in some ways. But all the extra exams, as well as the extra tests, drugs, and operations that doctors in Miami regularly order for their patients during the last two years of life, bring no aggregate gain in life expectancy: Again, all these equally sick patients are equally dead at the end of two years.

Other Dartmouth investigations have also uncovered dramatic regional variations in how Medicare patients with specific conditions are treated. For example, rates of shoulder replacement for Medicare patients are nearly three times higher in Aurora, Illinois than in Chicago. Elyria, Ohio has a rate of knee replacements that is more than two and a half times that of Manhattan.[9]

In general, the Dartmouth data show that the actual practice of medicine in the U.S. is only weakly based on scientific evidence, for otherwise there would not be such wide variation in medical practice. It also shows that patients receiving high-cost/high-intensity health care get no better and often worse results. Specifically, increased spending due to higher rates of hospitalization—as opposed to treatment in hospice, a nursing home, or a doctor’s office—brings no measurable health benefit to patients. Though high-spending hospitals often do have sicker patients on average, this difference is too small to explain more than a fraction of their difference in Medicare costs, and may be exaggerated in any event by the tendency of high-spending hospitals to over-diagnose their patients.[10]

The Dartmouth approach to estimating total waste in the system is to ask how much money could be saved if high-spending regions or hospitals reduced their per capita health-care expenditures to the levels observed in the lowest spending areas while maintaining equal quality. This approach generates Dartmouth’s estimate that 20-30 percent of health-care spending is medically unnecessary.

Using different methodologies, studies by New England Healthcare Institute (NEHI), McKinsey Global Institute, Thomson Reuters, and the Institute of Medicine (IOM) have generated similar results.[11] A 2012 study published in the Journal of the American Medical Association (JAMA) has found that waste may amount to as much as 47 percent of U.S health-care spending, while PricewaterhouseCoopers has calculated waste in excess of 50 percent.[12]

To put these numbers in perspective, if we accept the Institute of Medicine’s estimate that waste in health care comes to some $750 billion a year, eliminating that waste would be enough to:

  •  Provide free health insurance to every American worker;
  • Cover the grocery budget of every American household;
  • Provide every young person in America aged 18-24 the average annual tuition and fees of a 4-year institution of higher learning for 2 years; or
  • Pay the salaries of all of the nation’s first response personnel, including firefighters, police officers, and emergency medical technicians, for 12 years.[13]

According to the JAMA study, the U.S. is on course to spend as much as $11 trillion between 2011 and 2019 on health care that has no benefit to patients and that is in fact often harmful to their health.[14] Indeed, other recent studies show that approximately 200,000 Americans die from medical errors each year, including avoidable hospital-acquired infections and injuries. This makes contact with the American health system the third-largest cause of death in the United States, following all heart disease and all cancers.[15] 

Some Examples

In one important way, the magnitude of this waste is good news. It means that at least in theory it is possible to reduce health-care spending dramatically without denying beneficial treatments to anyone, or in other words, without resorting to rationing. Yet one does not have to think long about this subject before realizing that, as the cliché goes, one man’s waste is another man’s treasure. This is true not just in the sense that some of us want to receive treatments that at least some experts identify as unnecessary or even harmful. It is also, and more importantly, true because every dollar that is wasted in health care contributes to somebody’s income.

Consider, for example, waste in the form of treatments that kill or harm patients. According to Medicare’s Inspector General, in 2008, 13.5 percent of all hospitalized Medicare beneficiaries were harmed by the care they received, whether from medical errors, avoidable infections, or other adverse events. The cost to Medicare came to $324 million in October of 2008 alone, in the form of the bills it paid to treat patients injured by contact with the U.S. health-care system. [16] Yet all of that $324 million was also revenue for health-care providers, usually the very same ones who caused the harm.

Another huge form of waste in the health-care sector comes in the form of prices that are set not by competitive market forces, or even by government planners, but by various forms of self-dealing, collusion, and monopoly. One classic example is how prices are set in Medicare. The federal government does not, as one might imagine, set Medicare reimbursement rates by studying what kinds of physicians are in shortest supply, or by determining what the actual cost of delivering different kinds of health-care services is or could become using best practices. Nor does it rely on price signals sent by competitive markets. Rather, since 1991 it has effectively delegated the setting of reimbursement rates to a committee of the American Medical Association known as the Relative Value Scale Update Committee (RUC), which is itself comprised almost exclusively of medical specialists who pay to join the committee and then deliberate over how much the government should pay them.[17]

Notice that this is not a system in which a “bureaucrat stands between you and your doctor.” It is a system in which doctors—or more precisely, well-heeled, well-connected specialists—tell bureaucrats in the government how much the taxpayers should pay them for performing different procedures. Typically, the specialists who dominate this committee conclude that the particular specialties they engage in are highly valuable and deserve high compensation, while concluding that generalists, such as primary care doctors and family physicians, who are barely represented on the committee, deserve much less. Inasmuch as Medicare reimbursement rates serve as benchmarks in negotiations between providers and private insurers, it is not too much to say that a single, self-dealing committee of the AMA effectively sets prices throughout nearly a fifth of the U.S. economy.

This self-dealing is part of a much larger pattern throughout the U.S. health-care system and goes a long way toward explaining its huge waste and inefficacies. When it comes to accreditation of medical schools and the funding of residency programs, for example, or the licensing requirements for doctors, public money and public purposes are always deeply involved, but regulatory decisionmaking is almost entirely left to the very people being regulated. Not surprisingly, the regulations that emerge from such a system have largely devolved into throwing up barriers to entry that reduce competition, or that otherwise serve entrenched special interests.

A prime example of this is the current system for providing on-the-job training to the next generation of doctors. The federal government spends $13 billion a year subsidizing graduate medical education through its support of medical residency programs. Yet almost all of this money winds up producing the wrong kind of doctors in the wrong places, and hardly any of the kind we need most, because it is controlled by self-dealing incumbents.

The primary body for regulating residency programs today is a private organization called the Accreditation Council for Graduate Medical Education, which in 2011 collected accreditation fees of over $34 million from the programs it certifies.[18] Its board comprises representatives from its membership organizations, which are the American Board of Medical Specialties, the American Hospital Association, the American Medical Association, the Association of American Medical Colleges, and the Council of Medical Specialty Societies.[19]

Why does this matter? Because these private trade groups are dominated by teaching hospitals and other institutions that want the federal money to flow toward subsidizing the kind of residents they employ, rather than the kind the country desperately needs.

The United States faces an acute shortage of primary care doctors, including practitioners of family medicine. According to a survey sponsored by the independent Congressional Agency MedPAC, finding a primary care doc is highly problematic even for Americans with good health insurance. Among fully insured Americans over age 50 who went looking for a primary care doc last year, fully one out of seven report it was a “big problem.” This is double the percent who report having trouble finding a specialist.[20] Even in affluent parts of the country, finding a primary care doctor who is still taking new patients can require as much scheming as getting your three-year-old into Montessori. In rural and poor inner-city areas, it is often well nigh impossible. Nearly 60 million Americans—almost one out of five—live in regions or neighborhoods designated by the federal government as primary care shortage areas.[21]

Adding to the need for more primary care physicians is the crying need for more coordination of care throughout the health-care system, combined with more emphasis on prevention, patient education, and effective management of chronic conditions such as diabetes. By now health-care quality experts agree, to the point that it is a cliché, that the U.S. system suffers from too many poorly coordinated specialists treating just one body part at a time, and from not enough generalists treating the whole patient.

Yet the cooption of medical education policy by specialized medicine means that almost all the federal dollars flowing into medical education go to produce more specialists who go into practice in areas that are already oversupplied. Less than four percent of medical residents and fellows in the U.S. are in primary care programs.[22]

Elite teaching hospitals are the worst offenders. Massachusetts General Hospital, the flagship of Boston’s medical establishment, provides a good example. Despite receiving over $85 million a year in taxpayer subsidies for its residency program, Mass General does an abysmal job of turning out the kind of doctors in shortest supply.[23] Of the 1,148 residents who trained at the hospital between 2006 and 2008, only 6.49 percent went into primary care. Of all the graduates of Mass General’s residency programs, exactly none went on to practice in underserved rural areas, and only one went on to practice in a Federally qualified public health clinic, which is the kind of health-care facility most needed to accommodate the tens of millions of Americans who are gaining access to health insurance through Obamacare.[24]

Another example of the wasteful effects of self-dealing in American health care is revealed through the wide variation in prices charged for the same medical services among, and even within, different institutions. In 2009, for example, the price charged to health-care plans for an MRI scan ranged from as low as $509 to more than $2,600.[25] The consumer price of obtaining a hip replacement at nine top-ranked hospitals ranges from $12,500 to $105,000.[26]

Whether or not any given hip replacement is medically unnecessary, paying $105,000 at one top-ranked hospital for a procedure that can be obtained at another for $12,500 is clearly a form of at least financial waste, and all the more so if, as has been documented, the prices different hospitals charge for the same procedure largely reflect differences in market concentration rather than in quality. In markets where hospitals face little competition, commercial insurers are compelled to pay well more than double for a hip replacement operation than in competitive markets.[27] Meanwhile, as hospitals continue to merge and vertically integrate, more than three-quarters of Americans now live in hospital markets that meet the Federal Trade Commission’s definition of “highly concentrated.” According to the Robert Wood Johnson Foundation, when hospitals merge in already concentrated markets, the price increases often exceed 20 percent, and sometimes more than even 40 percent.[28]

Even within a given hospital, the prices charged for treating different patients with the same condition varies widely, according to how much power their different insurance companies were able to yield in negotiating contracts with that hospital. Currently, insurance companies are also merging at a furious rate in order that their own market power at least keeps pace with that of consolidating hospitals and other provider networks. Those without insurance, meanwhile, are charged far and away the highest prices, not because they are more expensive to treat, but because they lack the power to protect themselves from such price discrimination in a thoroughly rigged health-care market.

There are, to be sure, realms in which price discrimination can at least in theory lead to overall lower prices. For example, it may be irritating to discover that the guy sitting next to you on a plane paid $200 less for his ticket just because he bought it two weeks before you did. But at least that kind of price discrimination could fill seats that would otherwise go empty and thereby arguably reduces the average cost of flying for everyone.  But there is no way such logic applies in health care. As Princeton’s Uwe Reinhardt and other health care economists have noted, in this realm, charging different people radically different prices for the same procedures does not even in theory lead to greater efficiency or lower prices. Rather, it just wastes enormous resources as different parties scheme to shift costs on to one another through secret dealing.

It is not as if it costs a hospital more to run some patients through a CAT scan if they belong to certain insurance plans and not others. Nor are there savings to the system even theoretically obtainable by offering discounted scans to some patients and their insurance companies but not others. Much less is there any clinical case for widespread price discriminating in health care. Either a patient needs a scan or does not; getting a “special deal” on a scan you do not need just exposes you to unnecessary radiation.

A Way Forward

To be sure, as the population ages and effective new medical technologies come along, future generations of Americans may well want to consume more of at least some types of health care, and be willing to pay more for it. But there is no reason to tolerate health care inflation that results from self-dealing, legal and illegal price fixing, cartelization, or monopolization to further erode the financial foundations of the American family or the economy as a whole.

Before true reform is possible, however, we must recast the tired “liberal versus conservative” terms of debate over health care. Access to the American health-care system is a real problem, but one that cannot be solved just by expanding insurance coverage or entitlements so long as the underlying delivery system remains so stunningly inefficient. At the same time, any solutions that rely on competitive markets to increase efficiency (as opposed to simply cutting access to health care) will minimally require significant anti-trust action to break up existing cartels, including not just among health-care providers and insurers, but among the increasingly concentrated drug and medical device industries as well.

The question before us is thus not really one in which conventional dichotomies between government and markets apply. The system as we find it is one in which the flow of money even through putatively public programs is largely controlled by self-dealing, private trade groups (as for example, with the American Medical Association’s control over Medicare reimbursement rates), or the control of elite specialist groups over the flow of public money in medical education.

This means the choice is not really between laissez-faire and socialism, or between more government or less. The choice is between policies that effectively break up or regulate local, regional, and national health-care cartels and monopolies, and those that allow governance of the health system to continue under control of colluding special interests. When ordinary Americans, including preeminently those trying to preserve the economic foundation of the American family, become informed about what is really behind the health-care sector’s mounting threat to our way of life, true reform will be possible, but not before. 

Phillip Longman is Policy Director and Managing Editor at New America’s Open Markets Program. He is also a senior editor of Washington Monthly and a lecturer at Johns Hopkins, where he teaches public policy writing and health-care policy.

[1]     For health-care expenditures, see Centers for Medicare and Medicaid Services, “National Health Expenditures; Aggregate and per Capita Amounts, Annual Percent Change and Percent Distribution, by Type of Expenditure: Selected Calendar Years 1960-2012” (Washington, D.C.: CMMS, n.d.), Table 1, For hourly earnings, see Bureau of Labor Statistics Employment, “Hours and Earnings from the Current Employment Statistics Survey” (national) (Washington, D.C.: BLS, 2015),

[2]     Christopher Girod et al., “2015 Milliman Medical Index” (Seattle: Milliman, inc., May 2015),

[3]     U.S. Census Bureau, Table F-8, “Size of Family, All Races by Median and Mean Income: 1947 to 2013,”

[4]     Federal Reserve Board, “2013 Survey of Consumer Finances” (Washington, D.C.: Board of Governors of the Federal Reserve System, 2014), Table 1 89-98 01-13,

[5]     Bureau of Labor Statistics data, cited by Annie Lowrey, “Changed Life of the Poor: Better Off, But Far Behind,” New York Times, April 30, 2014.

[6]     Sara R. Collins, Petra W. Rasmussen, Michelle M. Doty, and Sophie Beutel, The Rise in Health Care Coverage and Affordability Since Health Reform Took Effect: Findings from the Commonwealth Fund Biennial Health Insurance Survey, 2014 (Washington, D.C.: The Commonwealth Fund, 2015), Web.

[7]     Robert Pear, “Health Insurance Companies Seek Big Rate Increases for 2016,” New York Times, July 3, 2015, Web.

[8]     Jonathan S. Skinner, Elliott S. Fisher, and John Wennberg, “The Efficiency of Medicare,” in Analyses in the Economics of Aging, ed. David Wise (Chicago: University of Chicago Press and NBER, 2005), 129–57; Jonathan S. Skinner and Elliott S. Fisher, “Reflections on Geographic Variations in U.S. Health Care,” The Dartmouth Institute for Health Policy and Clinical Practice,  March 31, 2010, Web.

[9]     Elliot S. Fischer et al., “Trends and Regional Variation in Hip, Knee, and Shoulder Replacement,” Dartmouth Atlas Surgery Report, April 6, 2010, Web.

[10]   Skinner and Fisher, “Reflections on Geographic Variations in U.S. Health Care.”

[11]   Jules Delaune and Wendy Everett, Waste and Inefficiency in the U.S. Healthcare System (Cambridge, MA: New England Healthcare Institute, 2008). Robert Kelly, Where Can $700 billion in Waste be Cut Annually for the U.S. Healthcare System?, Healthcare Analytics, Thomson Reuters, October, 2009; Mark Smith et al. (eds.) Best Care at Lower Cost: The Path to Continuously Learning Health Care in America, Institute of Medicine, National Academies Press, September 6, 2012, P. 3-11.

[12]   Donald M. Berwick and Andrew D. Hackbarth, “Eliminating Waste in U.S. Health Care,” JAMA 307.14 (April 11, 2012): 1515; “The Price of Excess: Identifying Waste in Healthcare Spending,” PricewaterhouseCoopers’ Health Research Institute, available at

[13]   Smith et al., Best Care at Lower Cost.

[14]   Berwick and Hackbarth, “Eliminating Waste in U.S. Health Care.” 

[15]   Charles Andel et al., “The Economics of Health Care Quality and Medical Errors,” Journal of Health Care Finance 39.1 (2012): 39–50, Web; Barbara Starfield, “Is US Health Really the Best in the World?” JAMA 284.4 (2000): 483–5.

[16]   D.R. Levinson, “Adverse Events in Hospitals: National Incidence Among Medicare Beneficiaries” (Washington, D.C.: Office of the Inspector General, Department of Health and Human Services, 2010), Web.

[17]   Haley Sweetland Edwards, “Special Deal,” Washington Monthly, July/August 2013, Web.

[18]   Cf. IRS 2011 Form 990 for ACGME,; Cf. also Frequently Asked Questions (FAQs) About the Accreditation of New Programs and Sponsoring Institutions, Program Mergers, and Changes in Sponsorship (Updated June 2014), 

[19]   ACGME 2010 Annual Report,

[20]   MedPac Report to Congress, March 2014, p. 98, Table 4-1,

[21]   Henry Kaiser Foundation, “Primary Care Health Professional Shortage Areas,” April 2014, h

[22]   Paul Jolly et al., “U.S. Graduate Medical Education and Physician Specialty Choice,” Academic Medicine 88.4 (April 2013): 468-74.

[23]   Robert Graham Center, “Graduate Medical Education for Teaching Hospitals in Fiscal Years 2000-2010,”, accessed July 27, 2015.

[24]   C. Chen et al., “Toward Graduate Medical Education (GME) Accountability: Measuring the Outcomes of GME Institutions,” Academic Medicine 88.9 (September 2013): 1267-80,

[25]   International Federation of Health Plans, 2010 Comparative Price Report: Medical and Hospital Fees by Country,

[26]   Jamie A. Rosenthal, Xin Lu, and Peter Cram, “Availability of Consumer Prices From US Hospitals for a Common Surgical Procedure,” JAMA Internal Medicine 173.6 (March 25, 2013):427-32.

[27]   James C. Robinson and Leonard D. Schaeffer, “Expert Voices: More Evidence of the Association Between Hospital Market Concentrations and Higher Prices and Profits,” National Institute For Health Care Management, November 2011, Web. 

[28]   Martin Gaynor and Robert Town, “Update: The Impact of Hospital Consolidation,” Robert Wood Johnson Foundation,  June 2012, Web.