The Expense of Health Care Explained: What Americans Need to Know

Sometimes it's hard to believe that the last presidential election happened at the height of the COVID-19 pandemic. Have our health care systems and hospitals been affected in lasting ways from that, or have they rebounded?

Cheryl Damberg: Hospitals have significantly rebounded financially due to federal bailout money, the PPP, and other funds. RAND looked at hospital finances comparing 2019 to the first two years of the pandemic, 2020 and 2021. Most hospitals had healthy profit margins during that period, largely due to a significant infusion of federal funds to support extra expenses.

However, inflation across the economy has negatively impacted the health care sector due to increased labor costs and, to some extent, supply shortages. Both hospitals and physician practices have been seeking higher payment rates to cover that. The Office of the Actuary for CMS and MedPAC expect inflation to trend downward and not be sustained, which should help reduce financial pressure on providers. Increased costs for labor and supplies have put pressure on hospitals' margins and increased the cost of borrowing for capital improvements. In the near term, providers continue to face increased costs and are seeking higher payments from payers.

Are there other factors driving rising health care costs now that are more lasting?

Andrew Mulcahy It's important to clarify “cost to whom?” in an answer to this question. For insurers and their pharmacy benefit managers, or PBMs, there's the constant flow of new, brand-name drugs to treat conditions where these buyers have very little leverage to negotiate discounts from manufacturers—cancer drugs are a great example. There are just a few new drugs fitting this description each year, and RAND research shows that competition eventually drives lower prices for individual big-ticket drugs. But, collectively, spending on expensive new “specialty” drugs, and particularly those administered by providers in offices or hospitals, is growing.

Damberg Another important driver of increased health spending is consolidation, which has picked up a lot of steam over the past decade. Historically, we've seen hospitals merge with hospitals, or physician practices with other physician practices. Now, there is vertical integration: Hospitals and health systems are buying up physician practices. Or health plans own PBMs. These organizations are also acquiring home health agencies and skilled nursing facilities. The federal government is paying a lot of attention to this—trying to slow down mergers and understand their likely impact on access to services and increased prices. RAND research has shown that when health systems buy hospitals, they reduce the less-profitable services available in certain communities, like maternity care.

So, getting bigger through consolidation isn't creating efficiencies that would drive down costs?

Damberg When hospitals and health systems acquire physician practices, they often redirect procedures to hospital outpatient departments which are more costly settings to provide care. So instead of paying only the physician fee when the service is provided outside the hospital, services delivered in a hospital outpatient department result in a physician fee and a hospital facility fee. We've done work that demonstrates this effect as well in the shift away from freestanding ambulatory surgery centers, which increases costs to payers and higher out-of-pocket costs to consumers.

All of this consolidation is particularly evident in the Medicare Advantage market, where three big plans dominate. With nearly 60 million people in Medicare, 54 percent are now in Medicare Advantage plans. That means health care in America is increasingly delivered by fewer actors with little competition to hold down spending.

Mulcahy In prescription drugs, just three large PBMs handle 80–90 percent of all prescriptions filled annually. Each of these PBMs is part of a broader conglomerate company that includes large insurers, retail pharmacy chains, dedicated specialty and mail order pharmacies, and urgent and other ambulatory care clinics—effectively a single company covering all of patients' health care needs short of hospital care. We know so little about the internal accounting and workings of these newly consolidated companies that it's hard to assess where money flowing in actually goes. For drug coverage, RAND is working with HHS to analyze newly collected “RxDC” data to better describe the economics of plan sponsor, insurer, and PBM dynamics. Congress is considering several proposals aiming for more transparency in arrangements between different—and increasingly co-owned—components of prescription drug markets.

Damberg Peter Orszag, former head of the Office of Management and Budget and the Congressional Budget Office, argued in an article that consolidation aims to create the kind of integrated care that the Affordable Care Act (ACA) envisioned. But to my mind the promise of integration is not being realized. Some argue it takes time for organizations to evolve. But so far financial integration has been easier than clinical integration. Clinical integration requires care redesign, investment, and getting everyone to work together. That is hard to do. And to date, we've not observed it yielding better clinical outcomes and greater efficiencies.

The United States currently has historically low rates of people who are uninsured. Can you talk about how we got there and whether that will last?

Damberg The ACA was essential in driving down the uninsured rate. A significant factor in this was the Medicaid expansions because many of the uninsured were lower-wage workers employed by small firms that did not offer insurance.

However, plans offered under the ACA can still be quite unaffordable for individuals and families. That makes the question of subsidies for insurance premiums critical. Over time, the handling of subsidies has varied. Obama implemented them, Trump threatened to take them away, and Biden extended them. The time limits and generosity of these subsidies are important factors. How far up the income scale these subsidies go—whether to people 10 percent above the poverty line, or 20 percent, etc.—is crucial. There is a risk of increasing the number of uninsured in the United States if these subsidies to individuals to purchase insurance through the ACA are not maintained or adjusted properly.

In surveys, Americans express that they are still very worried about unexpected health care bills. How effective has the No Surprises Act been? Or are there other policies needed to deal with unexpected medical costs?

Damberg The No Surprises Act (NSA) has been a big win for consumers because it has effectively taken the patient out of the equation. The challenge in implementation has been between the insurer and the providers, who are hammering out an agreed-upon payment rate. There also have been some hiccups and court cases, with providers asserting that they were previously in network but are now being pushed out of plans' networks.

Despite the benefits of the NSA, many people are at substantial financial risk in many areas of the health care system. A lot of Americans think when they qualify for Medicare, it will cover everything, but it doesn't cover long-term care provided in nursing homes. Or, as another example, many employers offer high-deductible health plans, which trade off lower health plan premium costs for much higher deductibles that consumers must pay before insurance kicks in. In 2023, 50 percent of those enrolled in high-deductible health plans had deductibles of $2,500 or greater. However, health needs are often unpredictable and unexpected, such as accidents or people developing cancer. Expenses for treatment add up quickly. And the average American has limited savings—around $500 to $1,000—leaving them at significant financial risk.

Mulcahy Even patients with drug coverage face uncertain and often substantial out-of-pocket spending when picking up their prescriptions. Formularies—which are lists of drugs covered by patients' plans with different tiers of coverage—are increasingly complicated and change frequently. The most expensive brand-name drugs are often on a formulary “specialty” tier where prescriber approval hurdles are extensive, and patients are responsible for a share of the drug's price tag—say 30 percent. Patients with drug coverage and just one prescription for a drug on a specialty tier can easily rack up thousands or tens of thousands of dollars of out-of-pocket payments per year. The Inflation Reduction Act limits out-of-pocket spending for Medicare enrollees to $2,000 per year, which for some will be a dramatic reduction.

Allowing Medicare to negotiate drug prices with pharmaceutical companies has just gotten underway. What might next steps be there?

Mulcahy This is a major policy and process change that came as part of the Inflation Reduction Act. But the negotiation provisions are narrow: Only older brand-name drugs without generic or biosimilar competition are eligible for negotiation. And a fixed number of drugs (10 in the first year of the program) are negotiated each year. Despite this relatively narrow scope, the negotiated prices that Medicare recently announced for the first year of the program are projected to lower Part D plan sponsor and enrollee spending on selected drugs by about $6 billion, or 22 percent. All else equal, these savings will put downward pressure on premiums and tax financing of the Part D program. There's much to keep an eye on in terms of industry responses and the important interaction between drug price negotiation for a few drugs and other, much more substantial Part D–related provisions in the IRA, including the $2,000 total out-of-pocket cap and major changes in financing.

Damberg The original legislation proposed included negotiating drug prices in the commercial health insurance space too, but that did not pass. The pharmaceutical industry strongly pushed back on that. If you listened to the debate between former President Donald Trump and Vice President Kamala Harris, Harris suggested that she would try to expand drug price negotiation for drugs used by those covered by commercial health plans. So, depending on legislative control and votes in the Senate and the House, this type of legislation might re-emerge.

Mulcahy Earlier legislative proposals also used prices in other high-income countries as an “upper bound” for negotiated prices. These provisions were also cut in the final language in the Inflation Reduction Act, though a variation could resurface. A series of RAND reports find that U.S. drug prices—even after negotiated rebates—are at least twice as high as those in other middle- and high-income countries. Other countries have formal, evidence-driven, and reasonably transparent processes to assess what “fair” drug prices might be relative to the measured benefits drugs provide to patients. The United States could stand up its own robust process like that.

How can the U.S. health care system improve access to care for underserved populations, including racial and ethnic minorities, and also rural communities?

Damberg Consider that Martin Luther King Hospital, a big safety net hospital in Los Angeles, routinely handles cases that should have been managed in an ambulatory setting. This happens because people have no convenient access to primary care providers or specialists in their own communities and face transportation problems that would require them taking multiple buses to reach care. They might have difficulty taking that time off work or face physical challenges to travel to providers who are far from where they live. The absence of primary care providers in a region is often referred to as an ambulatory care desert. To some extent, improving access to primary care relates to issues with the U.S. health care workforce—both the number of primary care providers and where they choose to practice. While we've been training more nurse practitioners and physician assistants, who are often key primary care providers in rural areas, they don't necessarily stay in primary care. We also have a decline in the number of physicians-in-training selecting primary care for their area of specialty. For decades it has been challenging to get primary care physicians to work in underserved urban areas and rural communities.

Telehealth has proven beneficial in many ways, particularly for those in rural communities as well as in areas where it is difficult to access a provider within the community. Before the pandemic, rural patients had to visit an originating provider's office to do a telehealth consult with a remote specialist. Now, people can do telehealth from their homes, including phone consults.

To maintain access to essential care services in rural areas, starting in 2023 Medicare allowed rural hospitals to convert to Rural Emergency Hospitals, where Medicare provides base annual payments to support operations, not tied to a particular patient's care. These hospitals are expected to offer emergency services and primary care, triaging other hospital care to different facilities. This is one example of support for rural providers, but more could be done to ensure access to care in rural communities.

You mentioned the workforce issue and primary care. The American Medical Association says 83 million Americans don't have access to primary care. What's producing this shortage?

Damberg If you look at the MedPAC report, you'll see we're replacing specialists at roughly the rate they're retiring or leaving the field. In primary care, the total number of providers has stayed the same, but the mix has changed. We're seeing fewer physicians trained and more nurse practitioners (NPs) and physician assistants (PAs) entering the market. However, because of the lack of specialty designation for NPs and PAs it is unclear what fraction of these NPs and PAs are working in primary care; they could be working in cardiology, obstetrics, or other fields. And even if they were working in primary care, NPs and PAs aren't a complete substitute for physicians in terms of their scope of practice.

The primary care workforce is facing significant challenges due to high work demands and a large payment gap compared with specialists. On top of that, medical schools are reducing primary care residency slots, partly because there aren't enough community-based trainers. So, although there is federal support for medical education and residency slots, making primary care more attractive through better payment and support for training the next generation is crucial. Additionally, improving working conditions is paramount. Primary care physicians face overwhelming patient loads and increased responsibilities. They are accountable for many aspects of care and performance on quality measures, which largely target primary care, and that creates additional burdens and stress.

Mulcahy RAND's analyses of Medicare's Physician Fee Schedule (PFS)—which covers roughly $100 billion in payments to physicians and other practitioners annually—spans multiple reports and over a decade of support to Medicare. Many of these reports focus on “misvalued” services, or services where Medicare payment is too high or too low relative to data on the time, work, supplies, and other inputs. Misvalued PFS services result in misaligned incentives for new practitioners choosing specialties. They also affect how practitioners choose between providing some services rather than others, both narrowly in clinical decisionmaking for individual patients and broadly in terms of which services to offer across all of their patients. RAND's current work in this area focuses on integrating external, verifiable, and easily updated data into the PFS update process, which right now relies heavily on survey-based input coordinated by specialty societies.

Are the shortages also affecting nursing?

Damberg At a recent MedPAC meeting, it was noted that we have more nurses than needed. The issue is where these nurses choose to work.

For nurses and other health aides, working in a physician's office or hospital is more attractive than in a skilled nursing facility (SNF), where working conditions are challenging, and payment rates are low, and where demand for nurses and health aides is great. These individuals have better alternatives to working in SNFs in the current economy.

Important to note is that the Centers for Medicare & Medicaid Services (CMS) recently passed a rule setting minimum nurse staffing requirements for long-term care facilities in order to reduce the risk of residents receiving unsafe and low-quality care. This policy change has created concerns among SNFs, because to attract nurses they may need to pay more, which is an additional cost burden. Medicaid is the most significant payer for SNF care, but it is unclear whether Medicaid programs in the 50 states will raise payment rates to cover higher labor costs. Relatedly, hospitals are worried about losing nurses to SNFs; however, hospitals are better positioned to pay more to compete and retain nurses but in doing so that will increase their labor costs. This will put pressure on nursing homes to figure out how to attract, recruit, and retain their workforce.

There are also people just leaving the health care profession because of burnout. Is anything being done to staunch that?

Damberg Regarding burnout and a sustainable workforce, we lack effective measures to truly understand the issue. We have some indicators, and people recognize it's a problem, but we don't have good solutions yet.

There's been discussion about reducing the burden related to quality measurement, which has grown over time. Provider organizations and hospitals face around 200 different performance measures, which is costly and overwhelming for them. There was a vision that electronic medical records would standardize data collection, allowing easy access to quality measures. But it turns out it's not that easy.

Technology also has unintended effects. For example, prior to technology driving scheduling in physician practices, many physicians were in independent practice and could control their schedules. Now, they work for corporate entities where electronic systems backfill physician schedules leaving physicians with little open time in their schedules to coordinate care by consulting with specialists. Doctors are scheduled back-to-back and are required to document care delivered, so much so that they spend evenings writing notes in patient charts. Thus, technology may have enabled more care visits to occur in a day, it has had negative impacts on physicians' sense of autonomy on use of their time and expanded the hours they spend working. We've essentially caused people to be running every minute of the day, and that that feels unsustainable.

Drug store closures and bankruptcies are one of the things drawing new attention to the role of pharmacy benefit managers (PBMs). What's going on with PBMs?

Erin Taylor Pharmacy benefit managers (PBMs) have received a lot of scrutiny in recent years, particularly as to their role in high drug prices. PBMs help design formularies, which are the lists of covered drugs and the amount patients pay when they fill a prescription, along with requirements related to receiving prior approval before the insurer will cover the drug. PBMs drew attention because of their lack of transparency in designing formularies and negotiating rebates with manufacturers. But it's not just PBMs. The entire chain through which prescription drugs are dispensed and reimbursed for patients is opaque.

Because of their high cost, tough decisions must be made regarding how to pay for some prescription drugs and for whom they should be covered. Policies that increase transparency might help ensure that PBMs, in their negotiations with drugmakers, truly are acting in the best interest of patients.

Both the Trump and Biden administrations pushed to make other health care costs more transparent too. Does that work at holding down costs?

Damberg RAND has done work making cost data transparent, showing that some hospitals around the country charge 200 to 300 percent of what Medicare pays. This is information that consumers could use to reduce their out-of-pocket expenses. More importantly, it gives critical information to employers to use with their plans who negotiate benefits on their behalf. Employers could say, “We're going to choose not to use this particular hospital because they charge 300 percent of Medicare.” Since releasing these data, we've seen employers in parts of the country using the data to negotiate reductions in hospital rates—which benefit consumers and employers.

Mulcahy Drug prices are another interesting example. There are like 30 prices floating around there for a single drug, often spanning an order of magnitude or so. Is the real issue that the prices aren't transparent, or that there are 30 prices?

Damberg Bigger picture, though, if you look at health care markets in the United States, most of them are heavily concentrated giving them the market power to set prices. So, what do policymakers do? Break up some of these players? Take other actions—such as increased price transparency, site-neutral payments, or eliminating anti-compete clauses—that promote increased competition?

There's a long arc of things that created pressure to or opportunities for these players to come together. But these bigger entities have not delivered on the promise of better coordination, better health outcomes for people, or better quality of care. The only thing we've seen is bigger and more expensive.