#ObamaCare and You: Uwe Reinhardt Discusses HealthCare Economics

October 17, 2013

healthcare economics uwe reinhardt

(Editor’s Note: The following is the third in a series of four exclusive HealthWorks Collective interviews on Health Policy by our Washington DC reporter, Steven Goldstein) 

healthcare economics uwe reinhardt

(Editor’s Note: The following is the third in a series of four exclusive HealthWorks Collective interviews on Health Policy by our Washington DC reporter, Steven Goldstein) 

Dr. Uwe E. Reinhardt is James Madison Professor of Political Economy and Professor of Economics and Public Affairs at Princeton University’s Woodrow Wilson School of Public and International Affairs. Recognized as one of the nation’s leading authorities on health care economics, Reinhardt has been a member of the Institute of Medicine of the National Academy of Sciences since 1978.


HWC: What are strengths and weaknesses of the American healthcare system, and how is the ACA supposed to address those weaknesses?

UR: One strength is a very well-trained workforce. We have perhaps among the best trained doctors in the world. Our hospitals are luxurious, and some think excessive. It’s very patient-focused and customer-oriented compared to other systems. In health care delivery, we have a lot of strengths. We are not heavy users of real health care by international standards. What we do is pay double the prices for the same thing. Anything that may sell in Europe for one euro is selling for two euros here. Also, with the huge amounts of money flowing into US healthcare, it has had the luxury of experimenting with novel approaches in technology and health care delivery. But for all we spend, we should have better performance. At its worst, leaving people without insurance or driving them into bankruptcy we are the worst in the world. The ACA is designed to help low income Americans to gain access to the system though federal subsidies and that is an improvement.

HWC: Why does the U.S. spend so much on healthcare compared to other countries?

UR: The reason is other countries have concentrated considerable buying power on the payment side of the health care system. So in Canada, it’s basically a single buyer, the government, and the same in England. By contrast, the US has splintered the payment side into thousand of little insurers, some big insurers. But within any market area, say New Jersey, very few insurers have the buying power and the hospital knows an insurer can’t sell insurance without having them in the network and that gives them market power and they exploit that. The same with drugs. In Europe, there’s more market power on the demand side and some may use price controls. We’ve structured our system so that the demand side, the payment side, has relatively little market power while the supply side has a lot of power. And that’s what drives up the prices.

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HWC: In one of your articles, you mention the $190 billion waste due to excessive administrative costs.  Will ACA add to admin costs or lessen them?  What about the other categories of waste – excessive services, for instance?

UR: It’s uncertain, but my own gut feeling is that it will add to the costs. The reason why it might reduce costs somewhat is that under these exchanges there is some standardization of the offerings, etc. But then you need huge armadas of navigators to help people to pick insurers on these exchanges because they are so complicated. I see nothing in the law really addressing administrative costs, which I consider a major failing. I also don’t see the law addressing other things like excessive services directly  other than through the payment mechanism. There is a distinct preference in the ACA for integrated care delivered by accountable care organizations, who get reimbursed not by fee for service but either by capitation or bundled payments. If providers who jointly deliver integrated care get a bundled payment per episode of illness or a capitation for chronic care per patient per year, they will have every incentive to minimize the excessive use of real health care resources, like tests, like imaging, like drugs. So indirectly it could eliminate some of the unnecessary care that’s now being given.

HWC: Which health care providers and insurance companies stand to benefit the most from the Affordable Care Act?

UR: The systems, like Kaiser or Cleveland Clinic, that have practiced integrated care for years and have been able to do that for bundled payments are ready to thrive in this world. And then there will be others, sort of the losers in some way, the independent practitioners that have a solo practice attached to their houses. I think most of that will just disappear. Things will be more aggregated. Some economists worry about creating too much monopoly power on the supply side.

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HWC: Should profits on medical devices and pharmaceuticals be contained somehow, and if they should, by whom?  Government?  Industry?  A third party?

UR: I’m on the board of a medical device company, so I should not comment. But I believe the marketplace should take care of it because the buying has shifted from individual physicians to a committee of device buyers in the hospitals. As for drugs, there was a debate whether Congress or the private market should regulate drug prices. I actually favor the private market. When you look at drug companies, the incremental production cost of an additional pill is actually quite low once you’ve done the R&D, the testing and the trials. When you buy a drug you’re paying back R&D expenditures for that drug and the ones that failed. Government could set prices below full cost and severely discourage R&D. But that can politicize the process, and the healthcare industry is a huge shareholder of Congress — you can quote me. And somebody has to pay for the R&D. The bulk buying private companies like CVS control prices to some extent. A private express scrips CEO is not likely to overpay for drugs, as Congress might.

health insurance exchanges / shutterstock