Freakonomics Radio - 456. How to Fix the Hot Mess of U.S. Healthcare

Episode Date: April 1, 2021

Medicine has evolved from a calling into an industry, adept at dispensing procedures and pills (and gigantic bills), but less good at actual health. Most reformers call for big, bold action. What happens if, instead, you think small?

So I think the general perception is that the American health care system is just messed up. Is the American health care system as messed up as most people seem to think it is? Oh, I think absolutely the U.S. health system is as messed up as people think it is, probably more so. That is Zach Cooper. He is a health care economist at Yale. I think the challenge, which makes it hard to address, is that there are pockets of amazing care and amazing innovation surrounded by a sea of dysfunction. If there are two fundamental drivers of our broken, costly healthcare system, I would say it's pricing failures and inappropriate care. And that is Marty McCary. He is a surgeon at Johns Hopkins and the author of The Price We Pay, What Broke American Healthcare and How to Fix It. We did a national survey asking physicians across the country, what percent of medical care, in your opinion, is unnecessary?

The average answer was 21%. If one in five services delivered in any industry is entirely unnecessary, you'd say that's where the waste is and that's where we need to focus. As we've noted before on this show, even doctors respond to incentives and the incentives in our healthcare system encourage procedures more than prevention. But it's not just unnecessary procedures that McCary's talking about. Over the past two decades, the number of prescriptions issued in the U.S. has nearly doubled. Did disease really double? No, we have a crisis of appropriateness.

As our healthcare system was becoming prolific at dispensing pills and procedures, it was also becoming a massive industry. Today, it includes more than 18 million workers, and it's still growing faster than nearly any other sector. The jobs have followed the money. Over the past two decades, the price of hospital services has outpaced inflation by an average of nearly 3.5% each year. Before COVID hit, hospital systems were making record profits. So were insurance companies, with the average American family of four paying about $20,000 a year for coverage. Many insurance firms have done even better recently, as the pandemic led patients to

put off non-essential care. So if you consider the primary stakeholders of our healthcare system, healthcare providers, insurance companies, and patients, the big players are doing extremely well. The stakeholders are making a ton of money, except for one stakeholder, which is the patient. The U.S. has the biggest GDP in the world, and we also spend the biggest share of our GDP on health care, about 17 percent, or $3.5 trillion a year.

Among other OECD countries, the average expenditure is 8.8 percent. After the U.S., the next highest is Switzerland at 12 percent. Now, you could look at America's massive health care expenditure and think, how great is it that we choose to spend so much of our money taking care of ourselves and our loved ones? For all that money, we must be absurdly healthy. But we're not. U.S. rates of infant mortality and maternal mortality are shockingly high. We also have high rates of

obesity, diabetes, and cardiovascular diseases. Life expectancy in the US does beat out Russia, India, all of Africa, and parts of Eastern Europe, but we're lagging Western Europe, Canada, Australia, Japan, South Korea, as well as Greece and Iceland. So what exactly are we getting for all those pills and procedures? Or maybe the better question is, why do we need so many in the first place? Here's one clue. The U.S. does not spend much money on prevention. The Centers for Disease Control and Prevention, it is right there in the name,

the CDC spends just $1.2 billion a year for all chronic disease prevention activities. That is less than $4 per person. So today on Freakonomics Radio, what would you do if you wanted to get better health outcomes without spending the trillions we currently spend. For 50 years, we've been told by hospitals, we can't give you a price. When I say the phrase, healthcare is a right, you say, what? I say that is a conversation that we have not had in America. And most healthcare reform calls for big, bold action. What happens if, instead, you think small? There isn't stuff that saves 15%. It's a series of 1% steps.

Is the solution to America's healthcare mess a 1% solution? That's coming up right after this. This is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. When the surgeon Marty McCary was starting out, he was a trainee at D.C. General Hospital. This was at the government-run city hospital in Washington, D.C. One elevator at D.C. General was particularly busy. And at one point, the elevator was broken and the doors were stuck in the open position. Well, some employee walked in there, fell and died. And I don't mean to make light of it, but for weeks afterwards, no one had put a sign or a note or a cone or a tape, do not cross or anything. And it's as if we were not learning from our mistakes.

And weeks later, somebody else fell in and didn't die, but hurt themselves. And it's as if we were not learning from our mistakes. And weeks later, somebody else fell in and didn't die, but hurt themselves. And I thought, gosh, who's in charge of this entire ship? Who's thinking about every aspect of safety and reliability at the hospital? Are we so fragmented that everyone's just doing their job, collecting their paycheck, and not thinking about the entire ship. The elevator incident stuck with McCary as a metaphor for the entire U.S. healthcare system. I think we have a lot of good people working in a bad system. And if you look at the individuals, they'll often want to do what's right, but they're a part of a small fragment of health care with its own business interest. And our system is so fragmented that the incentives are not often aligned.

In McCary's earliest encounters with the medical profession, it was not yet an industry. Growing up in Danville, Pennsylvania, I saw my father, a physician who treated leukemia and lymphoma patients, get hugs in the grocery store and at church, and people would come up and say, Dr. McCary, I can't thank you enough for taking care of me or my mom. How can you not be attracted to that? And then you go to medical school and you learn more about this public trust, and it's even more amazing than you see on the surface. You learn about Banting, the doctor who invented insulin, selling the patent for $1 so everybody could get it, changing forever the life of people with diabetes. You see Dr. Salk, who invented the polio vaccine in 1954.

He was told by his friends, you should get a patent on this thing. This could be the biggest moneymaker in the history of the world. You know what Dr. Salk said? He said, no, this is the property of humanity. Well, Salk lived a fine life. He didn't have 15 cars and three homes, but he did very well. That was the incredible heritage of the medical profession. Hospitals also had less allegiance to the bottom line. When American hospitals were built, they were built with a charter dedicating them to take care of the sick and injured, quote, regardless of one's race or creed or ability to pay in some instances. Many hospitals were built by churches.

They operated in the red for decades, supported by philanthropy. Where is that today? Today, you see some of the most aggressive predatory billing practices in the United States. We've created a term called financial toxicity, which is essentially a complication of care. Financial toxicity, meaning that a patient's out-of-pocket medical costs create a significant financial burden. How common is this? An estimated 20% of Americans are currently being pursued by a collection agency for medical debt. In a study of Virginia hospitals, Marty McCary found that in

one year, those hospitals filed 20,000 lawsuits against patients for unpaid bills. The majority of the hospitals that sued were non-profits. Now, just to be clear, about 60% of community hospitals in the U.S. qualify as non-profit, but that word probably does not mean what you think it means. Until 1969, a nonprofit hospital was required to provide care even to patients who couldn't afford it. That so-called charitable care standard was replaced with what is called a community benefit standard, which is, shall we say, a bit looser, and which allows nonprofit hospitals to operate pretty much like a for-profit business while enjoying tax-exempt status. In fact, nonprofit hospitals often make more money than for-profits.

Where does that money go? Executive salaries, for one. A Forbes analysis of the 82 largest nonprofit hospitals in the U.S. found that the vast majority of them paid their top earning executive between $1 and $5 million a year, with 13 of the 82 nonprofit hospitals paying their top executive between $5 and $21.6 million a year. And where does all that money come from? There's one key fact to appreciate that distinguishes hospitals from other businesses. Most businesses tell you right up front what you'll pay for a given service. As we'll hear later, that rarely happens in hospitals,

which can leave their patients, or customers really, on the hook for bills way beyond their means. Marty McCary's study found that Virginia hospitals often resorted to garnishing the wages of the patients who couldn't pay their bills. The average amount garnished was more than $2,700. The most common employers of these patients were Walmart, Wells Fargo, Amazon, and Lowe's. So how did this happen? How do we get from a system where hospitals used to take care of people for free to one where they

are docking the paychecks of people with jobs who still can't afford to pay? Following World War II, we had wage controls in the United States. Larry Van Horn researches and teaches healthcare economics at Vanderbilt. He also founded the Center for Healthcare Market Innovation. And that's led me to a fixation on the topic of price and price transparency over the years. Okay, let's go back to those wage controls after the war. In a tight labor market, to attract labor, employers started adding fringe benefits to their compensation package. Health benefits became one of those fringe benefits. By the way, this is not how most countries set up their health coverage during the 20th

century. In Canada, for instance, employers do offer some health care coverage, but it is supplemental to what the government is already providing. The U.S. became an outlier by tying health care coverage to employment. At first, companies extended these benefits only to the top-tier workers who had their wages capped, but it wasn't long before unions demanded insurance for all employees. Before World War II, only 10% of U.S. employees had health benefits. By 1955, that number was nearly 70%. What made this palatable for employers was a revision of the federal tax code. If your employer pays you in the form of

health benefits, it's tax-exempt. They pay you in cash, you have to pay tax. So that tax-exempt treatment of employer-sponsored health benefits really perverts the definition of insurance, the marginal incentive of how to compensate, and the aggregate level of insurance that everybody has. And so it's more than just the employer being the vehicle by which we pool risk and purchase insurance. It is this government subsidy in the form of tax-exempt treatment that is really pernicious. Let me just ask you, when I say the phrase, healthcare is a right, you say what? I say that is a conversation that we have not had in America. At some point, we're going to have to have an honest conversation about our limited resources and our limited capacity to provide unbounded medical care to every single person.

I believe in a civilized society that some basic level of health care services is appropriate. But right now, we have not bounded that conversation. In a book called An American Sickness, the physician journalist Elizabeth Rosenthal describes the industrialization of U.S. health care. It is a fascinating story with many twists. Between the rise of employer-based insurance and the passage of Medicare and Medicaid in the 1960s, health care was increasingly paid for by a third party, someone other than the patient. This lack of transparency led hospitals to start charging more. But those increases didn't last forever. Insurers and employers, with the encouragement of the federal government, tried to bring down those rising hospital costs. Until around the mid-1980s, hospitals were fairly free to set the prices they charged Medicare. But Medicare eventually established its own price list.

A hip replacement would be reimbursed at X dollars, a coronary artery bypass surgery at Y dollars. This led hospitals to adjust in at least two ways. The first was to push higher costs when feasible onto uninsured patients or patients with slim coverage. Hospitals also started hiring MBAs and consultants to treat their business more like a business. This brings us to where we are today, with 38% of Americans covered by Medicare or Medicaid and over 50% who get insurance through their employer. The current trend is for a lot of these employers to drive down insurance costs by doing the job themselves. A lot of businesses today are saying, why do we have insurance? That, again, is Marty McCary. Apple has over $100 billion in cash reserves.

That was true when we interviewed McCary. Apple now has nearly $200 billion in cash. Why do they need a company to protect them from high-priced bills? So what you're seeing now is a trend towards self-insuring. And what you're seeing is that employers like HEB are already fixing healthcare on a small scale. HEB is a Texas supermarket chain. I believe that we're the largest private employer in the state of Texas.

That's Martin Otto, the company's COO. And yes, HEB self-insures its employees. So by being self-insured, we basically put together through what's called a third-party administrator, a network of physicians and hospitals to whom our partners can go for service. Partners is what HEB calls its employees. Relative to what most plans offer, ours covers a higher percentage of cost than most of them do. And the type of health care services that are provided, it's very complete. So it's all of your health care needs, then dental needs, eye care needs. If somebody has mental health requirements, those are covered. It may strike you as unfortunate, or at least inefficient,

that a company that sells groceries has to simultaneously master the art of healthcare coverage. But according to Marty McCary, for a company like HEB, it's worth it. They take care of their own employees in their own clinics, and they have their own pharmacy plan because they have their own pharmacies. So they've successfully managed the care of their own individuals. More companies are starting to self-insure, especially larger firms. And there are strong incentives to eliminate the insurance middleman. Financial incentives for one, but also the desire to keep employees happy and productive. HEB, with its user-friendly health care coverage, is perennially ranked as one of the best places

to work in the U.S. In any case, healthcare insurance, no matter how a given person gets it, is the entry point for just about everyone in the U.S. healthcare system, since insurance is the model we have settled on to pay for healthcare. We are in a world of insurance. Larry Van Horn again. We've devolved to a world of prepaid medical care, much of which we don't value. And prices, given the lack of economic tension of having the individual in play,

have really come off the rails. What does Van Horn mean by the individual not being in play? Well, consider how healthcare procedures and prices typically work. I go to see my primary care doc, and I have a cough, and he says, you know, Larry, I think you should go downstairs and have a chest x-ray. And I go down and have a chest x-ray. It takes me three minutes. All's well and good. And bill $397, net of contractual allowance comes out to $197, and I have a $197 bill in my hand that I have to pay. When across the street, it's a $54 cash transaction. That's a problem. When there are no prices and people are charged after the fact through an intermediary like

an employer or their insurance that we see a tremendous amount of price gouging. That's Marty McCary. And most hospitals try to do the right thing. But there are instances when Americans are routinely gouged without even knowing it. Imagine eating a hamburger at a restaurant with no prices, and then afterwards, they give you a bill, and the bill's for $5,000 after you've digested the hamburger. You'd say, that is a system that preys on people who come in hungry. In healthcare, we are supposed to be an institution to serve the sick and injured. We're supposed to be there for people at a time when they're most vulnerable. And what concerns me about the price gouging and predatory

billing in medicine today is that it is eroding the great public trust in the medical profession. Having healthcare insurance doesn't necessarily protect you from exorbitant billing. The Yale economist Zach Cooper studies what is called surprise billing. So this is the idea of the fully insured person does all the right stuff in an emergency, goes to a network hospital, but unfortunately sees a physician who isn't in his or her network and then gets a bill later for hundreds or thousands of dollars. These sorts of things financially break people. And so a lot of us look on that sea of dysfunction

and say, wait a second, we're inefficient. We don't offer better care. And there's not altogether low probability that touching the system in the right way will bankrupt you.

Like, that's just absurd. And seemingly, we should be able to do better. Coming up after the break, Zach Cooper and others have some ideas for how to do better, although not everyone is a fan. There aren't a lot of people in the U.S. healthcare industry that are particularly excited about this. That's coming up right after this. One reason it's so hard to reduce health care costs is that prices are often hidden.

Many prices are negotiated in secret between insurers and providers. It can therefore be a guessing game as to what the patient will be liable for. There was a researcher who called 101 hospitals that do heart surgery in the United States and asked, what's the price of a standard CABG, or coronary artery bypass surgery? That, again, is the Johns Hopkins surgeon and researcher Marty McCary, the author of The Price We Pay. Only 53 could give him an answer, about half. Of those hospitals that gave him an answer, the price of the cabbage operation ranged from $44,000 to half a million dollars, with almost everything in between. For 50 years, we've been told by hospitals, we can't give you a price.

Now, no one's suggesting that we surgeons give you a price when you're shot in the chest. But 60% of health healthcare is shoppable, it's predictable, and we can do a lot better. McCary's 60% figure of shoppable procedures is higher than some other estimates. In any case, the opaque pricing he is talking about here may be changing sooner than you think. In June 2019, President Trump issued an executive order on price transparency in health care. What we did with this executive order is essentially provided data necessary for third parties in Silicon Valley or other places to make it more manageable for consumers to get price

information before they actually undertake services, presumably non-emergency services. That's Tomas Philipson, who at the time we interviewed him was acting chair of Trump's Council of Economic Advisors. This executive order had two directives. One is to require hospitals to disclose standard charges for all services and to provide negotiated charges or cash prices in a consumer friendly format for about 300 quote-unquote shoppable services. And the second one? The second one is for insurers and they have to essentially provide or disclose some kind of estimates of cost sharing for all covered services, essentially allowing the consumers to shop around more across providers. So here's what the president said in announcing it.

Hospitals will be required to publish prices that reflect what people pay for services. You will get great pricing. Prices will come down by numbers that you wouldn't believe. The cost of health care will go way, way down. So he's a politician. He can make those kind of broad claims. by numbers that you wouldn't believe, the cost of health care will go way, way down. So, he's a politician. He can make those kind of broad claims. You are an economist. What's the evidence for that kind of claim? In other words, do you feel there's empirical history and evidence that prices will come down, or is this more of a theoretical argument? Clearly, this will increase the price sensitivity

of the customers if patients have better price information. And that's probably why both hospitals and insurers are against it. The paper I know that started this literature is my predecessor, Austin Goolsbee, who in the early 2000s showed that life insurance prices went way down once there was posting on the Internet of their prices. And in health care, price transparencies led to about 27% reduction in lab test spending and 13% reduction in imaging. Well, of course, not everybody would use pricing information, but proxy shoppers would. Marty McCary again? That is, the employer plans, health plans, and those fraction of people who are paying out of pocket who act as proxy shoppers for the rest of us. When I go to the grocery store, to be honest with you, Stephen, I don't look at prices.

God's been good to me. I need to get in and out of there fast. But my mom does. She's looking at the price of a lemon at one store versus another and shopping based on price down to the penny. Her and her friends may represent 10 to 20 percent of shoppers at the grocery stores in my neighborhood, but they keep prices in check for all of us. The health care economist Zach Cooper is not as optimistic about the curative powers of price transparency. I initially had thought that price transparency was a huge deal.

That's where an economist initially goes to. It just isn't. Like, the reason we spend a lot is not because our prices aren't transparent. I think our prices should be transparent, but doing it isn't going to reduce healthcare spending. He came to this conclusion as a result of his own research. So we looked at how individuals consume lower limb MRI scans that are planned. It turns out that even when the prices are available, nobody uses the price transparency tool, even when they face tons of out-of-pocket costs. And how does that make sense, especially to you thinking it through as an economist?

So it turns out the reason they don't use it and the reason they drive past six lower-priced providers between their home and where they get care is because they listen to their doctors. So when we looked at what explained the price of people's MRI scans, it was all explained by their referring physician. A couple things to say about this. One, patients aren't used to finding health care prices, so it may take a while to learn about this option and to get acclimated. Also, as with any economic activity, there are behavioral elements to consider, too. Habits, for instance, are hard to break. Also, we trust certain people, our own doctors, presumably, more than we trust others. And finally, the path of least resistance is an appealing path. All that said, Trump's executive order on price transparency certainly got the attention of the healthcare industry. There aren't a lot of people

in the U.S. health care industry, provider, payer organizations that are particularly excited about this. That, again, is Larry Van Horn, the health care economist from Vanderbilt. He played at least a small role in the price transparency initiative. His passion for the topic was mentioned to President Trump by a mutual acquaintance, the economist Art Laffer. And that resulted in the president reaching out and having me come up and spend a little time chatting with him about it. I basically made a point that we have, you know, 18 percent of the U.S. economy where Americans are making purchase decisions every day without any idea what the price is. And that's fundamentally kind of un-American. As Van Horn said, most of the healthcare industry was opposed to the

executive order on price transparency. I asked him for what reasons exactly. Well, let's go through them. Number one, these are confidential business contracts, B2B contracts that exist in many sectors of the U.S. economy. B2B meaning business to business. That is, hospitals are directly negotiating these prices with insurers, not with patients. And you're setting a dangerous precedent by taking the gag orders off of confidential B2B contracts. My reply to that one is yes, but no. These aren't B2B contracts because when my payer negotiates with my provider and they legally enjoin me to pay money according to the contract that I have no visibility into, it's an entirely different world. And it's an even different world when the payer is the government as in the case of Medicare, correct? Sure. So that's one thing. The second point they make, they've argued, is there will be

tacit collusion and prices will go up. Well, if you honestly believe that, why are you fighting so hard to keep this? Is it really that you're such a great agent for the public interest? I don't believe that the market dynamics would support such conduct. I believe that markets are much broader, even in oligopoly markets where you say there will be coordinated pricing. The reality is that would be highly visible to everybody, including the FTC and DOJ. So I don't think that argument holds water either. Not long after Trump signed the executive order on price transparency, a lawsuit was filed against it by the American Hospital Association, the National Association of Children's Hospitals and several other hospital groups. They argued that the price transparency directive violated, among other things, their First Amendment rights.

The defendant in this lawsuit was not President Trump, but this man. I'm Alex Azar, and I was the 24th Secretary of Health and Human Services serving from January 2018 through January of 2021. Great. And what are you doing now? I am sleeping. As a defendant, because his department, HHS, is responsible for executing the executive order on price transparency, as well as other executive orders that Trump issued on health care reform, calling for lower drug prices and better access to telehealth services. Beyond these executive orders, the Trump administration pushed a variety of health care reform legislation. Those are very durable, legislatively authorized rules. So not by just a signing of the pen by the president, but these are actually very bipartisan things. Here's how Azar characterizes the Trump doctrine on health care. We were able to actually,

I think, restructure health care and build it all completely around the patient at the center. So, you know, for too long now, the patient has really been acted upon. The patient has been just subjected to procedures because we pay for procedures. And the patient hasn't been empowered to actually be part of a system that leads to higher quality and lower cost. We had so many distortions really dating back to the 1960s, and we tried to fix those distortions. For instance, rather than continue to focus on paying for procedures, we started paying for outcomes. So this is what we call the total cost of care initiative, where we will pay providers a total amount of money for a year, and they can work with you to improve your health, to keep you out of the hospital, keep you out of a nursing home. And that could mean they might buy you air conditioning at home or send in meals at home or do home visits, the social determinants of health we talk about, to keep'll get 100% of that savings. And if you cost them more money, then they'll eat 100% of that cost.

And so these kinds of initiatives are, I think, going to be viewed a decade from now as having fundamentally changed how healthcare is delivered in the United States in a way that puts the patient at the center, not our institutions and not our insurance companies. We're now realizing that we have been doing too much as physicians. That, again, is the Johns Hopkins surgeon Marty McCary. And many times it was with good intentions. Sometimes it was driven by the perverse financial incentive. But we're now seeing a movement of doctors asking, hey, can we treat gut problems with healthy foods? Can we start treating joint problems with yoga or treat diabetes with cooking classes? Maybe the first line treatment for hypertension should be meditation or changing your social environment. And maybe loneliness is one of the greatest public health epidemics that stresses the body's physiology.

These are the root issues that we need to be talking about. And the new movement to address root causes and lifestyle reasons for bad health is alive and well today. But the U.S. healthcare setup, as of now, still makes it much easier to get paid for treating illness than preventing it. You also have to wonder when an industry makes up 17 or 18 percent of GDP, trillions of dollars and millions of jobs, how likely are we to get the kind of reform that Marty McCary and Alex Azar and others have been talking about today? One encouraging sign is that the lawsuit filed by hospital groups against the price transparency order was rejected by an appeals

court. As of January 1st, hospitals were required to publish their prices. A stipulation requiring insurance companies to publish their rates goes into effect next January. Drug discount prices are also included in that 2022 rule. But how much will hospital price transparency really matter? One potential problem, the fine for not posting prices is $300 a day or around $110,000 a year. Is that a big enough incentive for a multi-billion dollar hospital chain? It brings to mind a study we described in our first Freakonomics book about a bunch of daycare centers in Haifa, Israel. Some parents were routinely late in picking up their kids, so the management decided to invoke a fine, $3 per incident per child. The fine would be added to the family's monthly bill, which is just under $400. So what happened? After the fine was enacted, the number of late pickups

doubled. Why? Because a fine is also just a price. And if the price is low enough, it's worth paying. Larry Levitt, a health policy executive with the Kaiser Family Foundation, wonders if the hospital fine may teach us all the same lesson. While the Trump administration's new price transparency requirement is quite sweeping, he tweeted, the enforcement of it is weak, a maximum fine of $300 per day. The technical term for that is chump change. I wonder how many hospitals will just pay the fine. A recent Wall Street Journal investigation found another way for hospitals to get around

the price transparency regulation without even paying the fine. Hundreds of hospitals have embedded code in their websites that prevented Google and other search engines from displaying pages with the price lists, the journal reporters wrote. The price information is technically on the hospital's website, as one information science professor told the journal, but good luck finding it. It's one thing not to optimize your site for searchability, he added. It's another to tag it so it can't be searched. It's too early to say how the Biden administration will further Trump's healthcare reform initiatives or perhaps come at different angles. What is clear

is that the Democrats also believe there is a massive amount of bloat in our medical system with too much money paid out to too many arms of the health care hydra. How much bloat? Here's what the health care economist David Cutler, a veteran of the Obama administration, told us not long ago. We have a $3.5 trillion medical system, and our best guess is that a trillion dollars a year is unnecessary. One feature of healthcare reform, as with most reforms, is that the reformers like to take big swings. A big swing would be something like Medicare for All or get rid of private insurance

and some combination like that. Or at least a medium swing. A medium swing is patch up the ACA and focus on costs. But what about instead a series of little swings? That is what Zach Cooper, the healthcare economist at Yale, that's what he's been thinking about. Yeah, so the broad idea was, you know, I was getting close to tenure and could think a little more about doing things that made the world better. And I gave a lecture, actually at a really big insurance company about the need to do randomized trials. And this company was spending a couple billion a year on lower limb MRI scans. And it turns out if you could get patients to just go to the place closest to their house, they would have saved a billion, which for them was about 1% of spending. And I got off the stage and a senior executive came up and said, hey, this is great, but we don't want research that tells us how to save 1%.

We want you to do the research that tells us how to save 15%. What did Cooper tell him? There isn't stuff that saves 15%. It's a series of half percent or 1% steps. Cooper realized that pretty much everyone who thinks about cutting healthcare costs has the same idea as this insurance executive. That unless you can save 15 or 20 or 25%, a change isn't worth making. But what if, Cooper thought, what if he could come up with a whole bunch of 1% changes instead? He was so excited by this notion that he reached out to some other healthcare economists.

He told them he was looking for legitimate, viable, evidence-based policy ideas that could trim at least a little bit from the healthcare hydra. And thus was born the 1% Steps for Healthcare Reform Project. It's a compilation of three to five page briefs from folks who I think are the smartest health economists in the country, where each brief is saying, look, based on the research that they've done, what are discrete tangible steps that we could take that each would reduce health spending by, you know, a half or a percent. And then cumulatively adding those 10 to 15 proposals up can reduce healthcare spending

in the U.S. by hundreds of billions of dollars without the type of huge interventions that we often see in the presidential debates. So what are some of these 1% proposals? Cooper's own idea is about hospitals that don't have many or even any other hospitals nearby. I think of the town where my father lives, which is Bennington, Vermont. There's a single hospital there that doesn't face any competition. And it turns out that about 20% of hospitals in the U.S. look a lot like that. Cooper and some other economists analyzed hospitals

around the country, and they found two key facts. The first is that when hospitals are monopolies, they have higher prices, and prices that are really quite a bit higher, 10 to 15 percent. And second, they have quality that's worse. Hospitals are the largest area of healthcare spending in the U.S., and these 20% have 15% to 20% premium on them. How do we set prices in regions where there isn't competition? In most markets, an economist would expect that competitors would rush in when there's profit to be made. But it is a lot harder and more expensive to open a second hospital than it is to open a second gas station or pizza place, especially in a small city or rural area.

I just don't think there's a real way to introduce meaningful competition. So what's Cooper's solution? It sort of makes the economist hairs on the back of my neck stand up. Come on. It's okay. You can say it. I don't like price regulation reflexively, but I think that's where we are. Price regulation? That's almost never the answer an economist gives. Well, so I think we're in a position where we need to introduce price regulation in these markets because these markets, frankly, are natural monopolies. The way you can think about the healthcare system and hospitals operating in

monopoly markets is at worst, they're a giant sucking machine that's sucking money out of very, very hardworking folks who are doing their best to pay very, very high insurance premiums and seeing that transfer to the healthcare system, which is primarily staffed by some of the wealthiest people in the country. So yeah, I'm definitely not getting a Christmas card from most monopoly CEOs. But I don't think we have a choice. Okay, so that's one proposal from the 1% Project. Another, based on research by Jason Abeluck and John Gruber,

is about how people choose a health insurance plan. We can't reasonably hope that folks can choose between 100 different plans. And actually, if we constrain the choices people have, they make better choices. Again, this notion, constraining choices, is not what economists usually preach. Their rule of thumb is that more choice is better. But Abeluk and Gruber found that many of the extra insurance options were low quality. And actually, if we maybe have a default option that looks at you and says, huh, based on who you are and what you spent over the last couple of

years, we're going to default you into the best plan for you, that that actually will increase competition and create stronger incentives for insurers to lower prices. The insurance industry is cast as the villain and the profit maker in a lot of this. And it's obvious to me, at least, that there's some good cause for that. Are they as intentionally untransparent as many people assume them to be? So I don't think there's anybody with a monopoly on virtue or a monopoly on vice in the system. There are two things to think about when we think about insurance companies. The first is higher healthcare costs really are paid by us. So you get your bill from your insurance company and it seems really, really high. Well, that's because the underlying cost

of healthcare in the US is high. Now there's some profit margin mixed in there, but most of it is the hospital and the doctor and devices. The second thing is because of the Affordable Care Act, we put in what are called medical loss ratios, which say that a certain percentage, thereabouts of 80% of what an insurer takes in has to go out the door to cover healthcare costs. They're in a sense, profit caps. And so you say to a firm, look, you can only make 20% of the profits. The way to make more profits than absolute dollars is to grow the pie. And so it's sort of a perfect storm of circumstances to generate a system that raises costs and lower it. Now, one of your 1% colleagues, John Gruber, was involved in the creation of that scheme.

Do you think that was an oversight? If you look at the history of the policymaking process around the Affordable Care Act, it was the economists who were pretty against the medical loss ratio elements. There was a big push, I think, from the political folks to say, look, we can't require everybody to have insurance and not somehow constrain profits. And so I think that's like the ugly space where policy meets politics in the U.S. Here's another 1% solution that Cooper's colleagues have been working on. So it turns out that about 15% of the Medicare budget is spent on post-acute care, which is care that's provided basically after you've been in a hospital.

Post-acute care can happen in a variety of places, in the patient's home with a home health visitor, in a skilled nursing facility, or in what is called a long-term care hospital. And long-term care hospitals are interesting. They're not really distinct from skilled nursing facilities. They're sort of an administrative construct, which grew out of the way the Medicare fee-for-service program was built in the early 80s. They started as a small group of hospitals that were meant to be rehab facilities, but they were paid way more than any other post-acute provider. And what you saw happen is something that you see across the healthcare system, which is that a group of folks, often private equity firms, realize that this particular

group of providers, in this case, long-term care hospitals, get paid way more than anybody else for the same thing. And then they start investing in them. And they start popping up across the country. Wow. And needing more customers. Yeah, exactly. And they become really hard to get rid of. The economists Amy Finkelstein, Liron Einov, and Neil Mahoney did an analysis of these long-term care hospitals. And they tried to see, well, wait a second, are they offering better care? Because, wow, we pay them about $30,000 more per case than we do anybody else. And the answer turns out to be no. I think it's a really good example of sheer waste. There's just nothing in that sector that

provides goods, just rent-seeking, and it raises spending by about $4 billion a year. So it sounds like much of what you're describing up and down the line is what you economists call rent-seeking, right? Extracting profits without adding value. But there are constituencies attached, right? Those rent-seekers are people and firms and shareholders and so on. Let's imagine that all of your 1% solution proposals were ultimately adopted, at least to some degree. Who are the constituencies that lose out the most and how much do they lose? When we think about waste in the U.S. healthcare system, we need to think that that waste is somebody's income. And it makes it really, really hard to tamp out.

And what that's led me to do in my own work is think a lot about the political economy of the U.S. healthcare system. It turns out members of Congress literally get more money when health spending goes up in their district. And when they do things that steer benefits to healthcare providers in the form of higher payments, they get a huge amount of additional money in campaign contributions. And so we actually have a system that rewards politicians for taking steps that raise spending. With such a complicated system, you can see why so much previous health care reform has attacked very large targets. The problem, as Zach Cooper points out, is that those large targets have large constituencies attached with all sorts of entrenched interests and a lot of resources to fight. That's why he is betting on the 1% solution. And it's a bet that is starting to pay off, at least a little bit.

In December of 2020, President Trump signed into law, as part of the COVID relief funds, oddly enough, a package that had two provisions related to surprise billing. Surprise hospital billing, you may recall, is another of Cooper's research areas. His paper on the topic was published in the prestigious Journal of Political Economy. One part of the law was what's called a hold harmless provision, which basically says, look, if you're a patient who sees an out-of-network provider that you can't avoid, you can't be billed directly by that provider. You're only going to face the usual cost sharing that you'd get under normal circumstances. And second, it established a process through which physicians and insurers could settle disputes if there was a payment dispute. So this was sort of the textbook example for us of what could be done.

It was a cool thing to see a paper that went from like the Journal of Political Economy hashing out an idea to ending up in Congress. Awesome. Congratulations. Thanks. And I think it actually will make a difference. It'll take time to see how much difference that legislation makes and to see how many other 1% solutions get adopted. But next time on the show, we look into one segment of the health care industry that accounts for way more than 1% of spending. It's 6% to 7% of Medicare's overall budget, and it's almost 1% of the entire federal budget. I don't know what the legal definition is of fraud,

but I think you're going to see some of those firms get pretty close to the limit. The very strange economics of kidney care and the dialysis industry. That's next week. Until then, take care of yourself, and if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. We can be reached at radio at Freakonomics.com. This episode was produced by Zach Lipinski. Our staff also includes Allison Craiglow, Mark McCluskey, Greg Rippin, Mary Deduc, and Emma Terrell. We had help this week Thank you. Check out the show notes, which have links to all the underlying research. Visit Freakonomics.com. As always, thanks for listening.

I'm going to go on a bender here. Let's go. Let's have it. Freakonomics Radio Network. Stitcher.