by Tom Robertson
Executive Director, Vizient Research Institute

I grew up in the 1950s and 60s, before air conditioning became standard equipment in automobiles. My dad couldn’t afford new cars, so in 1968 he bought a 1965 Chevrolet with no air conditioning and no power windows. For road trips, we piled into the back seat and turned mechanical cranks to lower the windows, hoping for a breeze as the car motored through the sweltering heat of late summer. I was the oldest of three siblings, so I had my own window, from which I stuck my head like a dog, ears flapping in the wind. My two sisters fought over the remaining window, one climbing over the other to get a blast of air between passing trucks. No one wore seat belts back then, so the struggle for seating created a cacophony that rose to a fever pitch. Eventually, my father grew impatient with the window debate and uttered the words that exasperated parents have used since cars were invented: “Stop arguing. Don’t make me pull over.”

Created in the same year as our family car –1965 – Medicare has had a profound impact on the way health care is financed. Political pressure to make the Medicare program seem less costly than it really is has caused the prices paid to hospitals and physicians to increase more slowly than the rate of increase in costs. The addition of Medicaid increased the pressure on providers to close the funding gap by negotiating higher and higher prices with private sector insurers. The subsidization of government sector prices by private sector payers is not a new phenomenon, but after decades of compounding, the magnitude of the pricing imbalance is difficult to defend.

The rationale for maintaining a system in which government payments are artificially low while private sector payments are artificially high is unclear when we consider the fact that almost all of the money comes from the same source: the working population.

Medicare does not work like a pension. We don’t set aside money while we are working to cover the costs of our own medical care after we retire. The medical expenses of current retirees are largely paid by payroll deductions from today’s workforce. Our parents paid for our grandparents, we are paying for our parents, and we are counting on our children to pay for us.

By and large, the overwhelming majority of current health care spending - for services rendered to workers and retirees - comes from the productivity of today’s workforce. If the same workforce is paying for both public and private sector spending, where is the logic in having such widely disparate pricing in the two benefit systems?

A Medicare or Medicaid patient’s gall bladder is in the same place as that of a private sector patient. There is no reason to expect the cost of a cholecystectomy to be lower for the Medicare or Medicaid patient. In fact, the elderly and the poor have clinical and socioeconomic complications that suggest their costs may be higher, not lower.

So how did we arrive at a place where public sector prices are so much lower and private sector prices are so much higher than either would be if everyone paid the same?

As private insurance plans increased their deductibles from hundreds of dollars to thousands, the impact on seriously ill patients was very small, because they will hit their spending limits either way. But for families with less severe medical problems and private sector coverage, the higher prices needed to offset government shortfalls create significant financial burdens for individual households. Aging baby boomers are converting from higher-paying private insurance to lower-paying Medicare at a record pace. Even a slight shift in payer mix can wreak havoc on a hospital’s bottom line.

In a system where virtually all of the funding comes from the same place – current workers – why should one hospital struggle with a slightly higher proportion of government patients while another hospital prospers with a slightly higher mix of private sector patients?

The least disruptive path out of the financial cul-de-sac is not a single payer system. The elimination of private insurers, and the jobs they represent, is inconceivable politically. What is easier to imagine is an all-payer pricing schedule. Higher prices for government programs, lower prices for private insurers, and rational prices for all patients. Not a road without bumps, but a course that is increasingly difficult to avoid.

Efforts to curb spending via price transparency will fall short of expectations but may actually accelerate consideration of rate review. Price transparency will not slow spending appreciably because most spending is incurred by patients whose episodes of care are too expensive for individual service prices to matter. But the public awareness of health care prices and the initial responses by insurers and providers to the idea of price transparency suggest a possible collision course. Prices once largely hidden from view are gaining unflattering attention. Meanwhile, both insurers and providers consider prices to be proprietary – a form of trade secrets – and each of them points to government prices as the reason that private sector rates are so high.

To patients, and more importantly to the working population who ultimately pays the bills, it must sound a little like an argument in the back seat over windows. We should be prepared for the possibility that they will pull the car over.

About the author and the Vizient Research Institute: As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.