327 - Choices, costs, and challenges in US healthcare: insurance, drug pricing, & potential reforms

KEYPOINTS

• 01

  US healthcare is a roughly $4 trillion system, close to a fifth of the economy.

  Saum Sutaria, CEO of Tenet Healthcare and formerly a leader in McKinsey's healthcare practice, puts US healthcare at about 17–18% of a roughly $28 trillion GDP, or about $12,000 per person. Consumers pay about a quarter (around $1 trillion), employers another quarter, and federal and state government roughly half, counting direct spending plus the tax subsidy for employer insurance. For scale, he notes total post-tax US corporate profits are just under $4 trillion, and federal health spending of about $1.8 trillion exceeds defense (about $1 trillion) and Social Security (about $1.2 trillion).

• 02

  A simple map of where the money goes: administration, then thirds.

  Saum estimates administration takes 10–15% of spending, which he calls one of the biggest gaps between the US and other countries. Of the rest, roughly a third goes to hospitals and facility-based care, a third to physicians and clinics, and a third to drugs and devices, including drugs given in hospitals. He prefers this to the older 'half facilities' framing, which hides the physician pay and pharmaceuticals inside hospital spending. Peter adds that administration is partly the price of choice: other countries have administration too, but it sits in one government payer and skips line-by-line adjudication.

• 03

  The shift to third-party payment removed price sensitivity and drove consumption.

  In 1950 the US spent under 5% of GDP on health, and more than half was paid out of pocket. Today direct out-of-pocket exposure is about 15%, so about 85% of spending is paid by a third party. A 1954 law made employer insurance a pre-tax benefit and entrenched it. Medicare and Medicaid followed in 1965, when health spending was around 6% of GDP. Combined with a wave of innovation in drugs, devices and procedures, this created what Saum calls a 'virtuous cycle' of rising spending, which has grown about 2% per year faster than GDP.

• 04

  Health insurance has become a 'discount card' for predictable chronic care.

  Insurance is designed for 'random, infrequent and unpredictable events' such as heart attacks, accidents and appendicitis. Today spending is driven by chronic and often multiple illnesses, including diabetes, heart disease, and even HIV and cancer, which are now managed long term. 'You don't use your car insurance to get an oil change,' yet we route checkups and lifelong prescriptions through insurance. Insurers succeed by understanding concentrated risk pools, where about 5% of members may account for half of costs.

• 05

  Other rich countries control cost by restricting supply, not by better 'value-based care.'

  Universal coverage creates the same moral-hazard demand, so systems like Canada's limit capacity. Emergency care is fast, but elective care such as hip and knee replacements, cataracts and scheduled heart surgery involves long waits. Peter frames it as four variables: quality, access, choice and cost. The US fixes the first three at the maximum and lets cost float, while others cap cost and give up access and choice. Their spending still rose from about 4% to 11–12% of GDP.

• 06

  Drug pricing is distorted by negotiation rules and pharmacy benefit manager (PBM) rebates.

  Saum says the Medicare Modernization Act of the early 2000s barred HHS from negotiating drug prices, and the Inflation Reduction Act 'cracked that door open.' Medicare already acts as a monopsony that sets prices for doctors and hospitals. PBMs, mostly owned by insurers, earn rebates for formulary placement, which can reward higher list prices. Peter recounts a pharma CEO who wanted to launch a drug cheaply and was told by PBMs to triple the price first and recoup the difference through rebates. Saum hopes that isn't the norm. He favors curbing price inflation over imposing OECD-level prices, which he warns would chill innovation.

• 07

  US life expectancy lags because of deaths before 65, not because of the medical system.

  The US moves from near-last to first among rich countries in life expectancy over roughly ages 60–75, which Peter credits to its strength at treating chronic disease. Saum attributes the earlier gap to infant mortality two to three times higher than peers, homicide about seven times higher, injuries, overdoses (more than 100,000 a year) and obesity-driven disease. Meanwhile the US does better on vaccination, cancer screening, blood pressure and cholesterol treatment, and smoking. 'This isn't a coverage problem,' and public health has been ineffective against these behavior-driven conditions.

• 08

  The real squeeze is demographic: fewer workers per Medicare beneficiary.

  Medicare covers about 65 million people and may reach about 90 million around 2032, when the inflow of new retirees peaks. Medicaid already covers about 90 million. In the 1980s there were about two people aged 40–65 for every Medicare beneficiary, and that ratio is heading toward one to one. Because commercial insurance cross-subsidizes government payment rates that are often below cost, a shrinking working-age base strains the whole system. Saum sees the next decade as the hard part.