How America skimps on healthcare

Pearl is a clinical professor of plastic surgery at the Stanford University School of Medicine and is on the faculty of the Stanford Graduate School of Business. He is a former CEO of The Permanente Medical Group.

Not long ago, I opened a box of cereal and found fewer flakes than usual. The bag inside was barely three-quarters full.

This wasn’t a manufacturing error. It was an example of shrinkflation. Rather than raising prices, big brands have started giving Americans less of just about everything, hoping no one would notice.

This kind of skimping doesn’t just happen at the grocery store. It has been present in American healthcare for more than a decade.

What happened to healthcare prices?

With the passage of the Medicare and Medicaid Act in 1965, healthcare costs began consuming ever-higher percentages of the nation’s gross domestic product.

In 1970, medical spending took up just 6.9% of the U.S. GDP. That number rose to 13.3% by 2000 and reached 17.2% in 2010.

People assume expensive care is better care. And, in turn, they expect pricier treatments will lead to longer, healthier lives.

Indeed, that’s what happened in the United States from 1970 to 2010. As medical costs consumed more and more of our nation’s total worth, longevity leapt nearly a decade.

Then U.S. healthcare hit a ceiling

Starting in 2010, something unexpected happened. Both of these upward healthcare trendlines flattened.

Spending on medical care today still consumes roughly 17% of the U.S. GDP—the same as in 2010. Meanwhile, U.S. life expectancy fell from 78.7 years in 2010 to 77.3 years in 2020.

What happened?

Skimping on U.S. healthcare

With the passage of the Affordable Care Act of 2010, healthcare policy experts hoped coverage expansions would lead to better clinical outcomes, resulting in fewer heart attacks, strokes and cancers. They assumed fewer life-threatening medical problems would bring down medical costs.

That didn’t happen. Though the rate of healthcare inflation did, indeed, slow to match GDP growth, the decreases weren’t the result of higher-quality medical care, drug breakthroughs or a healthier citizenry. Instead, they were driven by skimping.

And as a result of skimping, the United States has fallen further behind its global peers in measures of life expectancy, maternal mortality, infant mortality, and deaths from avoidable or treatable conditions.

Here are three examples of how healthcare skimping lowers costs but at the price of poorer health:

1. High-Deductible Health Insurance

For most of the 20th century, patients with insurance paid a small portion of their total medical costs, usually a few hundred dollars each year.

Around 2010, employers adopted high-deductible insurance plans to offset the rising cost of insurance premiums. With this model, workers are now paying up to $7,050 for single coverage and $14,100 for families—before health benefits kick in.

Insurers and businesses argue that high-deductible plans force employees to have more “skin in the game,” incentivizing them to make wiser healthcare choices.

But instead of promoting smarter decisions, these plans have made care unaffordable for many. Nearly half of Americans have taken on debt due to medical bills. And 15% of people with employer-sponsored health coverage (23 million people) have seen their health get worse because they’ve delayed or skipped needed care due to costs.

2. Cost Shifting

Unlike with private insurers, the U.S. government unilaterally sets prices when paying for healthcare. In doing so, it transfers the financial burden to employers and uninsured patients, which leads to skimping.

To understand how this happens, remember that hospitals pay the same amount for doctors, nurses and medicines, regardless of how much insurance kicks in. If the dollars reimbursed for some patients don’t cover the costs of providing care, then other patients are charged more to make up the difference.

Two decades ago, Congress enacted legislation to curb federal spending on healthcare. This led Medicare to drastically reduce how much it pays for inpatient services. Consequently, private insurers and uninsured patients now pay double Medicare rates for hospital services, according to a Kaiser Family Foundation report.

These higher prices generate heftier out-of-pocket expenses for the privately insured and massive bills for the uninsured, causing financial strain that forces millions of Americans to forgo necessary tests and treatments.

3. Delaying, Denying Care

Insurers act as the bridge between those who pay for healthcare (businesses and the government) and those who provide it (doctors and hospitals). To sell coverage, they must design a plan that (a) payers can afford and (b) providers of care will accept.

Increasingly, insurers are relying on prior authorization to restrict medical care usage.

Originally promoted as a tool to prevent inappropriate medical services, prior authorization has become an obstacle to excellent medical care. Insurers know that busy doctors will hesitate to recommend costly tests or treatments that are likely to be challenged. And even when they do move forward, patients who grow weary of the wait often give up and forgo further care.

This dynamic creates a vicious cycle: costs go down one year, but medical problems worsen the next, requiring even more skimping the year after.

The Real Cost Of Healthcare Skimping

Federal actuaries project that healthcare expenses will soar another $3 trillion, consuming 20% of the GDP, by 2031.

The reality is that our nation can’t afford to pay that much more. But instead of improving the efficiency and effectiveness of medical care, our nation is doubling down on skimping.

Already, Medicare decreased payments to doctors 2% this year with another 3.3% cut proposed for 2024. And this year, more than 10 million low-income Americans have lost Medicaid coverage as states have begun to roll back eligibility following the end of the Covid-19 pandemic. And insurers are increasingly using AI to automate denials for payment.

The truth is that the U.S. healthcare system is grossly inefficient and financially unsustainable. Until someone or something disrupts that system, replacing it with a more effective alternative, Americans will get less care, leading to poorer health.