This is part two of a series on American healthcare. It may make more sense if you start with Part One.  As with Part One, much of this information comes from Ezekiel Emanuel’s Which Country Has the World’s Best Health Care?

 Where does money come from?

Of the United States’ about 325 million people, around 180 million are covered by employer-sponsored health insurance, accounting for approximately 20% of health care spending. Employees pay on average 18% of the cost of their premiums for individual plans and 31% the cost of their premium for family plans, equivalent to about one-third of median income. Employers pay the remainder of the premiums as a form of tax-exempt reimbursement. To some extent, employer contributions to insurance are taken from wages; it is widely acknowledged that employees would make more if their employers were not covering their health insurance.

More than half of employer-sponsored insurance prices are determined by insurance brokers working on commission. This system incentivizes brokers to negotiate higher rates. Some brokers are now working in other models like “pass-through” in order to minimize that incentive.

Another 22 million people purchase health insurance individually, 11 million of those through “exchanges” set up by the ACA. Eight million people receive insurance subsidies that were once paid for by the federal government. But after the recent discontinuation of these federal subsidies, insurers–still required by law to provide subsidies–were forced to increase premiums on non-subsidized patients in order to cover the cost. Overall, individuals pay for about 28% of all health care spending.

Roughly 28 million Americans, most of them between the ages of 20 and 40, have no health insurance. A small number of uninsured patients receive care through subscriptions to physician practices in a growing model called “Direct Primary Care.”

Where does the money go?

As with public insurance, hospitals consume about a third of spending. In most private insurance, both individual and employer-sponsored, payments to hospitals and physicians are negotiated individually and tend to be roughly two to three times rates paid by Medicare.

Like in public insurance, hospitalizations are covered according to “Diagnosis-Related Groups” (DRGs), fixed, pre-specified amounts paid according to the diagnosis codes attached to the hospitalization. Unlike public insurance, the rates paid for any given DRG can differ by many multiples. The highest rate a given hospital receives from any payer for a given DRG is known as the “charge master” price, and it tends to be exorbitant; when you hear about sixteen-dollar Tylenol or similarly absurd prices on the evening news, it is the charge master price that is being cited. Medicare rates are roughly 31% of the charge master rate.

Physician payments, as in public insurance, consume about 20%, of all health care spending. Commercial insurers base their payments on a multiple of the CMS Physician Fee Schedule.

Pharmaceuticals consume about 17%, of all health care spending and are considered the first- or second-most egregious source of excess spending (behind administrative complexity) in the American health care system. Pharmaceutical prices are not set solely by drug companies. Pharmacy benefit managers, or PBMs, are companies that manage prescription drug benefits for commercial health plans and self-insured employer plans, along with public insurers. PBMs have three revenue sources: supply chain fees paid for the work of managing the benefit plan, which is uncontroversial; “Spread pricing,” a controversial tactic in which the PBM keeps the difference between manufacturer and insurer prices for a drug; and manufacturer rebates, in which a fraction of the cost of the drug to the consumer is transmitted back to the PBM so that the manufacturer’s product can obtain preferred formulary placement over the products of competitors. Rebates have grown in magnitude out of proportion to the health care economy. Insulin has a typical rebate of 66%, for example. As such, revenues of PBMs exceed even those of the pharmaceutical companies with whom they negotiate. In 2017, Express Scripts’ revenue was roughly $100 billion. Pfizer’s revenue was $52 billion.

Outpatient pharmaceuticals are typically covered according to a tiered pharmacy benefits plan, with Tier 1 generic drugs costing ~$10/month, Tier 2 preferred branded drugs costing ~$35/month, Tier 3 non-preferred branded drugs costing ~$70/month, and Tier 4 specialty drugs often being covered under a “coinsurance” model of ~25% patient payment.

Dental and vision care

Private insurers cover dental and vision at varying rates. Most patients have supplemental insurance for this purpose.

Long-term care

Private insurers do not, for the most part, cover long-term care, and long-term care insurance is rare, with only 0.5% of employers offering it. Fewer than 10% of employees nationally have long-term care insurance, in spite of the ~$90,000 annual cost of nursing home care and projected steep rise in need in the next few decades.

Administrative complexity

The United States has much higher administrative cost and complexity than peer countries, owing to a patchwork of private insurance plans with few harmonized features. Overall overhead is 8%, but this rises to 14% if private insurance-related activity is included. Ten other wealthy countries average 3% overhead. We spend roughly four times what Canada spends on administrative overhead, for example. The $812 billion per year we spend on administrative overhead exceeds the entire budget of Medicare.

What do we get from our health care spend?

Medical innovation, at least in terms of new drugs, therapies, and surgeries, is quite high in the United States. America is first in the world in clinical trials, number one (by far) in Nobel Laureates in Medicine, number one in medical patents awarded.

That said, health outcomes in the United States generally lag behind peer countries. We have far more uninsured patients. We have the highest maternal and infant mortality rates in the developed world and the lowest life expectancy. We are in the bottom third of developed countries in happiness.

Our excess costs are not related to utilization of medical services, but rather to inflated prices. All excess cost of pharmaceuticals in America is due to higher prices than in other countries, not increased use. Rates of hospitalization and the length of stay of those hospitalizations are lower in American than in most peer countries.

Pre-pandemic, Bloomberg rated American health care as 35th best in the world, between Costa Rica and Bahrain. In 2000 the World Health Organization ranked the United States 37th (again, ironically, just behind Costa Rica).

As the Medical Director of the Kansas Business Group on Health I’m sometimes asked to weigh in on hot topics that might affect employers or employees. This is a reprint of a blog post from KBGH.