Behind the medical debt crisis
High deductible plans are the problem. Strict limits on out-of-pocket costs plus payment reform is the solution.
The problem of families beset by rising medical debts has reached epidemic proportions. More than 100 million people or 41 percent of all adults are in debt to hospitals, physicians, and other providers.
The recent rise in high deductible insurance plans in the face of ever higher prices charged by hospitals is to blame. Nearly half of medical debtors owe more than $2,500 with one in eight owing more than $10,000, according to a Kaiser Family Foundation poll conducted earlier this year. Not many doctors send bills that high.
The issue received front page treatment in a two-part series in the New York Times this week. The Sunday story focused on poor patients pursued by debt collectors on behalf of Providence, the Renton, Wash.-based non-profit hospital chain with 52 hospitals in seven western states. Providence reported $27.3 billion in revenue in 2021 with a three percent operating margin.
(I always hesitate to use the word “profit” when referring to surpluses at non-profit hospital chains, which own about 80 percent of the in-patient beds in the U.S. Those surpluses go into hospitals’ unrestricted investment portfolios. For instance, at the end of 2021, Providence had $11.6 billion in long-term investments, well above its $6.8 billion in long-term debt.)
The Monday story took Richmond-based Bon Secours Mercy Health to task for using surpluses generated by Medicaid’s 340B drug program to build new facilities in wealthy neighborhoods while slashing services at its inner-city hospital. The 340B program allows hospitals serving poor patients to buy drugs at discounted prices and then charge the joint state-federal program the full price. 340B was set up as a back-door way of generating funds for charity care.
The Times’ reporters were following up on a multi-part investigation rolled out by Kaiser Health News and National Public Radio over the past three months. Lead reporter Noam Levey reported last June that rising medical debts are preventing Americans from “saving for retirement, investing in their children’s educations, or laying the traditional building blocks for a secure future, such as borrowing for college or buying a home.
“Perhaps most perversely,” he concluded, “medical debt is blocking patients from care.” About 1 in 7 people with debt said they’ve been denied access to a hospital, doctor, or other provider because of unpaid bills, according to the poll.
In the latest in the series, Levey reported today on hospitals in the Dallas-Fort Worth area, where major hospital chains like Baylor Scott & White, Children’s Health and Texas Health Resources are pouring money into building new hospital towers and stadium naming deals while pursuing patients for unpaid medical debts. Dallas-Fort Worth has among the highest hospital prices in the country, in part because Texas, which hasn’t expanded Medicaid, has the highest uninsured rate in the country: 18 percent in 2019 or twice the national average.
But lack of health insurance isn’t the major reason why people are racking up huge medical debts. As Levey’s stories repeatedly point out, the main cause is the rapid rise of high deductible health insurance plans, which grew from just 15 percent of plans in 2010, the year the Affordable Care Act passed, to 45 percent of plans in 2018, according to the Bureau of Labor Statistics. The median deductible, that is, the amount a person has to pay before insurance kicks in, was $2,000, enough to put most low-income and many moderate-income families permanently in debt.
All the stories are noticeably short on solutions to the problem, which can be summed in two short bullet points:
Place strict limits on what anyone has to pay for health care each year; and
Bring down hospital prices.
Rising underinsurance
The Affordable Care Act set several new requirements for companies selling health insurance, whether they are selling individual plans on the government-run exchanges or group plans to employers. For instance, insurers can no longer discriminate against people with pre-existing medical conditions. And numerous preventive services must now be provided free of charge.
But the ACA failed to place adequate limits on out-of-pocket expenditures. This year, the average deductible on the lowest-cost bronze plans sold on the exchanges (with drug and medical coverage combined) reached $7,051 per year, according to the Kaiser Family Foundation. That’s on top of the monthly premiums for the plan. Even the average deductibles for silver plans ($4,753) and gold plans ($1,600) can send many middle-income earners into debt when someone in the family requires hospital care.
No wonder a 2020 Commonwealth Fund survey found fully 43 percent of adults under 65 were underinsured, which the survey defined as total out-of-pocket expenses for health care, excluding premiums, being more than 10 percent of household income (or 5 percent for people living on 200 percent of the federal poverty or less). The survey was taken prior to the economic downturn caused by the pandemic.
The recently enacted changes to the Medicare drug benefit in the Inflation Reduction Act provides a poor model for how to handle this underinsurance pandemic. It set a flat $2,000 annual limit for out-of-pocket drug expenditures. While that’s a major boon for well-off retirees with high drug expenses, it will still be major hit to low-wage workers with high drug bills whose only retirement income comes from Social Security.
A better way to go is to limit share of household income that can be spent on all health care, whether that household is in a high deductible plan or a government program. What should that level be? The federal government currently allows high earners who itemize deductions to reduce their taxable income by any medical expenses that exceed 7.5 percent of adjustable gross income. If that were used as the cap, a family earning the median $70,784 income in 2021 would pay $5,309 in total medical expenses (premiums, deductibles and drug expenses) in any given year.
A more generous 5 percent cap would cut that by a third to $3,540 or about $300 a month for the median family. Households earning half the median or less (the working poor) would never pay more than $150 a month for health care.
Making plans affordable
Of course, requiring insurers to limit out-of-pocket expenses would raise insurance premiums for employers unless the government stepped in with direct subsidies. Given the current political environment, that’s a non-starter and probably unwise.
The better solution is to bring down the total cost of care, which is not driven by insurance industry profits and overhead (although that doesn’t help), but by high hospital prices, high drug and medical device prices, and high physician salaries – all of which are significantly above what other advanced industrial countries pay. A new book, Big Med: Megaproviders and the High Cost of Health Care in America by David Dranove and Lawton R. Burns, reviewed here by the Lown Institute’s Shannon Brownlee, persuasively shows how hospital industry consolidation has become the main culprit in driving insurance premium prices inexorably higher, and why the industry should become the next target for reform.
But as Brownlee notes in her review, the authors’ excellent analysis is short on solutions. She points to Maryland’s single pricing system, where all payers, whether government or private, pay the same price for care episodes. In recent years, the state’s all-payer or single-price reforms have been tied to global budgets for every hospital in the state. As this article that I helped write shows, the program has proven it can save money for Medicare and Medicaid.
While making a nationwide transition to all-payer pricing and global budgets would boost spending by the government-run programs, which currently pay prices below the actual cost of care, the extra money would immediately flow to employers and other private-plan purchasers, who currently pay more, in the form of lower plan premiums. The government will benefit in the long run by setting hospitals’ global budgets below the rate of economic growth, which, over time, will reduce health care’s share of the overall economy.
Of course, the shift toward greater government spending (a better way to put it is equalizing the prices paid by government payers) would need to be accompanied by changes in tax law. The government needs to ensure those employer savings are returned to employees, whose wages, as every economist knows, include the cost of benefits like health insurance.
There are multiple solutions to dealing with high drug and device prices, the first being to expand Medicare’s new power to negotiate drug prices and to allow private payers to take advantage of those negotiated prices. As for physician salaries and eliminating the incentives to provide unnecessary services, the key, as I wrote in this recent article, is to abandon fee-for-service medicine, make all physicians salaried, and create a salary structure that rewards primary care and prevention.
Despite the daily assault of negative news about the rise of authoritarians at home and abroad, I remain an optimist about the future of this country. I am hopeful that we’re not too far away from a new era of reform that will tackle the major challenges confronting the U.S. and the world, first and foremost among them global warming.
When that political shift occurs, health care reform will once again be on the agenda. A decade-and-a-half ago, the ACA, a bill primarily concerned with extending health insurance, merely experimented with various delivery system reforms, all of which had limited participation, and only a few of which proved modestly successful. The next major health care bill needs to dramatically change the way we pay and deliver care, and make those changes universal.