Just fix the damn roads!”Footnote 1 That memorable slogan famously propelled Gretchen Whitmer to her first term as Michigan’s governor.Footnote 2 Constituents latched on to the message, parroting the phrase at the then-gubernatorial candidate during a 2018 Fourth of July parade.Footnote 3 The slogan was simple, pragmatic, and addressed a problem state government could actually do something about. Indeed, the voters understood, approved the message, and elected her as that purple state’s first Democratic governor in almost a decade – and by a nearly ten percent margin.Footnote 4 They re-elected her in 2022,Footnote 5 in no small part because she (mostly) lived up to that promise.Footnote 6 I have been deeply immersed in analyzing, teaching and writing about the health sector for more than half a century, and, inspired by Governor Whitmer’s adopted platform, offer my prescription for mending our broken health system, I now say: “Just fix the damn payment system!”
It’s that simple, and it’s damned hard. Worse, I have no easy solution to offer, not least because fixing it requires federal government action, a far more unwieldly beast than addressing the problems of a single state. But I do propose a partial roadmap for improvement. The most obvious solution would be some form of universal, government-sponsored insurance coverage that could administer payment across the board, such as Medicare for All.Footnote 7 Or at the very least put a toe in the water with something like a public insurance option at the federal level.Footnote 8
But just writing those sentences brings home the futility of such an aspiration in the country’s current political and economic climate. Too many players are too deeply invested in the lucrative but irrational status quo to surrender it quietly, and those seeking reform seem too diverse and too fragmented to achieve meaningful reform. Game, set and match. What nonetheless follows is a cautionary commentary on three different federal health sector payment approaches of the past half century. All were designed to entice private sector actors to invest in health care, and all were successful from that point of view.
The first two deal with public pricing gradually going sour in government-administered programs (Medicare and Medicaid). The third deals with the mostly private sector pricing of pharmaceuticals following enactment of the Hatch-Waxman and Biologics Price Competition and Innovation Acts. These examples, through which Congress intended to lure private sector assets into health care markets, illustrate some highs and some lows of our convoluted, tortuous, and often incomprehensible payment systems.
Some History and Background
A month after I graduated from law school, President Lyndon B. Johnson triumphantly signed the Social Security Amendments of 1965,Footnote 9 the midwife to modern Health Law. The Act gave birth to Medicare and Medicaid, which established health insurance for the poor and elderly, and those revolutionary programs were implemented a scant year later.Footnote 10 U.S. health care transformed itself completely in their wake.Footnote 11
Before 1965, medical services were no sure thing for old and indigent people – care was sporadic and catch-as-catch-can for elderly and impoverished individuals lacking health insurance.Footnote 12 That meant that when serious illness struck, most of them were just a step or two removed from going up the river financially or into the ground. But everything changed thereafter for an obvious reason: open-ended financing for medical services abruptly released pent-up demand for those significant populations.Footnote 13 These newly-insureds could suddenly get medical services that would be reliably paid for; and the health sector got itself invigorated.Footnote 14
The United States allocated only five percent of its gross domestic product (GDP) to health care back in 1960,Footnote 15 but ever since Medicare and Medicaid began remaking the health industry, spending on health services has grown almost twice as fast as has the U.S. GDP.Footnote 16 After peaking at 19.7% during COVID, health care still accounted for at least 17.3% of the country’s output in 2022 and is predicted to keep rising absent significant structural reform.Footnote 17 Yet our indices of public health still lag behind those of the rest of the developed world’s countries, which spend a far smaller share of GDP on the endeavor while insuring virtually their entire populations.Footnote 18 Indeed, about eight percent of the U.S. population still lacks reliable insurance protectionFootnote 19 (even after the Affordable Care Act has expanded coverage to fifty million more Americans over the past decade),Footnote 20 and we spend at least one-and-a-half times as much money per capita in delivering health services to Americans than any other country does in providing such services to its citizens.Footnote 21 The United States is doing something really wrong here, and failing to cover our entire population is a big part of why we fare so badly in global public health comparisons.
We also fare badly in getting value for the money we do spend, in large part because of transactional and other costs associated with our highly fragmented payment system, which is layered with inefficiencies and perverse financial incentives.Footnote 22 Just over thirty-six percent of the insured U.S. population already enjoys government-sponsored health insurance through Medicare, Medicaid, VA and CHAMPVA for the military and veterans, as well as through various smaller government programs.Footnote 23 Employer-sponsored and individual private health insurance plans cover most of the rest of the population (except for that pesky eight percent that remains uninsured).Footnote 24 That means those providing health services to insured Americans must incur the staggering transactions costs associated with seeking reimbursement from an overwhelming array of different possible sources.Footnote 25 In a 2020 study of the sector’s costs in 2017, administrative costs for private insurers were conservatively estimated to account for about 6.5% of national health expenditures,Footnote 26 whereas those for government-administered insurance programs accounted for only about 1.3%.Footnote 27
Nursing Home Bed Supply
“Follow the money” has always been the mantra I give students seeking to understand the health sector. Watch what providers do when funding for health services becomes plentiful and watch what they fail to do when little or no money is available to pay for care. The supply of nursing home beds was an early case in point. Before Medicaid came on line as a source of reimbursement for nursing home resident care, the few available facilities were mostly small mom-and-pop operations financed primarily out of patients’ and their families’ pockets.Footnote 28 In the years immediately following Medicaid’s passage, long term care services played an outsized role in rising health expenditures, with nursing care and home health care expenditures representing average annual growths of 19.8% and 15.1%, respectively, from 1966 to 1973.Footnote 29 By 1975, just under a decade after Medicaid became effective, “expenditures on … nursing home care were five times their 1966 level[.]”Footnote 30 This long term care was financed primarily by Medicaid’s new federal-state cooperative insurance program for poor people,Footnote 31 which soon turned into the highest category of expense in most states’ budgets.Footnote 32
The private sector, enticed by freshly available payment resources, jumped into the market to propel nursing home bed supply dramatically upward.Footnote 33 This had both positive and negative ramifications,Footnote 34 but Medicaid essentially converted taking care of the elderly into a social responsibility rather than a family burden. Private actors responded to the public need, and many soon discovered they could do quite well by doing good, thanks to the loopholes and distorted financial incentives of early Medicaid reimbursement.Footnote 35 Many states then cracked down on supply through their Certificate of Need programs, and the federal-state funding partnership gradually reduced financing.Footnote 36 Now, fifty years later, Medicaid payments are routinely pilloried as shamefully low in relation to costs,Footnote 37 indicating a current payment system potentially ripe for revision.
Medicare Advantage
Private Medicare Advantage health insurance plans (Medicare Part C, established in 1997)Footnote 38 followed the same trajectory of private sector salvation for a public problem, followed by exploitation, that was seen with nursing homes. The federal government knowingly priced Part C plans (usually closed panel HMOs funded by capitation) extremely generously at the outset.Footnote 39 Capitated systems were thought to control costs better than had Medicare fee-for-service pricing.Footnote 40 Congressional largesse was again relied upon in 2004 specifically to bring more private sector insurance companies into this Medicare insurance market,Footnote 41 and the tactic continues to be spectacularly successful: fifty-four percent of Medicare beneficiaries are now currently enrolled in Medicare Advantage plans.Footnote 42 But a significant number of private insurance underwriters have abused their favored status, and headlines now rail against their fraudulent behavior.Footnote 43 Donald Berwick, the former head of the Centers for Medicare and Medicaid Services, recently excoriated Medicare Advantage plans for destabilizing Medicare funding by deceptive upcoding to get favorable rates.Footnote 44 The lesson from both these examples? Administered pricing per se constitutes no panacea for delivering cost-effective care. Overly generous reimbursement and fraud opportunities can always vitiate the most promising payment schemes. Vigilant regulatory oversight is thus essential to thwart abuse.Footnote 45
Pharmaceutical Pricing
The often low prices for the more than ninety percentFootnote 46 of all U.S. prescriptions now filled by generic drugs are pretty much a modern miracle.Footnote 47 1984’s Hatch-Waxman Act was phenomenally successful in using market forces to reduce the prices of most drugs that our citizens consume.Footnote 48 Before Hatch-Waxman the generics market share was only thirteen percent, and only slightly more than a third of the top-selling branded drugs with expired patents had generic competition.Footnote 49 By 2023, FDA had approved more than 32,000 generics,Footnote 50 however, and the ninety-one percent of prescriptions filled with them accounted for a mere eighteen percent of all prescription drug costs.Footnote 51 A rousing success by anyone’s calculation.
Hatch-Waxman established an abbreviated FDA approval pathway for generic small molecule drugs that bypassed the expensive and time-consuming clinical trials formerly hampering getting low-cost competitors to market.Footnote 52 In 2010, Congress passed the Biologics Price Competition and Innovation Act (the “BPCI Act”) as part of the Patient Protection and Affordable Care Act (the “ACA”), establishing a parallel set of incentives for biologic drugs and their eventual “follow-on” biosimilar competitors.Footnote 53 The fruits of the latter legislation are ripening now as the first tranche of biologics following the new pathway have fallen over the patent cliff.Footnote 54
In return for Congressional benevolence toward generics and biosimilars speeding them to market, Hatch-Waxman and the BPCI Act also increased the time that pioneer products (and their applications for new uses supplemented by new clinical studies) could enjoy their initial marketing monopolies.Footnote 55 This legislative compromise gave these reference products expanded patent protection and made them (and other special applicants for licensure like orphan drugs) eligible for a host of new marketing exclusivities.Footnote 56 One step backward for patients before the one step forward for consumerism. These statutorily-enhanced monopolies have proved extremely costly for consumers of new drugs, whose insurers have at least theoretically had to pay whatever the legislatively-created monopolist manufacturers charge.Footnote 57
One might think that a monopsonistic buyer like Medicare could have cut a deal for its high-volume purchases of these new products, but Congress struck a devil’s bargain with the pharmaceutical industry when Medicare’s Part D prescription drug coverage for seniors was finally enacted in 2003.Footnote 58 Likely in order to secure passage of Part D over potential industry pushback, Congress included a “non-interference clause” prohibiting Medicare from using its monopsony power to negotiate price.Footnote 59 Almost twenty years later, President Biden’s Inflation Reduction ActFootnote 60 has partially revoked that clause, enabling the government to bargain directly with manufacturers for certain high-priced drugs with no generic or biosimilar competitors.Footnote 61 The first round of those negotiations has recently concluded, producing a pricing agreement (to go into effect in 2026) on ten expensive drugs that would have saved Medicare $6 billion had it been operative in 2023.Footnote 62
Governmental buying power has thus fittingly re-surfaced to level the formerly unbalanced Medicare drug purchasing market. The lesson here differs from that for direct government pricing: when government defers to the market to price the product it pays for, it should never tie one hand behind its back during the bargaining process.
Conclusion
The United States has never considered health care a basic human right, as does almost all the rest of the developed world; the cost in dollars and to U.S. citizens’ health is unacceptably high. As the population ages over the next decade, health care costs are projected to outpace the economy and are soon expected to devour a fifth of the nation’s output.Footnote 63 It may be politically impossible to switch the road we now travel, but we need tougher regulation to straighten out more of the curves and smarter strategies to fill the deepest potholes if we are to avoid an entirely predictable crash.
