Why this economist calls the healthcare system 'a cancer on the American dream'

Is the healthcare system working for the average American? 

In a time of polarized opinions, this seems to be one of the few questions that yields a consensus, and the answer is most often, regrettably: No. 

Most Americans are painfully aware of how the healthcare system fails consumers, whether they’ve personally struggled to access affordable and quality care, or if they’ve simply absorbed the seemingly countless news stories of individuals who face financial ruin after receiving an unmanageable hospital bill. 

According to a 2022 nationwide poll by Kaiser Family Foundation, more than half of U.S. adults reported going into debt due to healthcare bills. Of those, millions have declared bankruptcy, making it the leading cause of bankruptcy in the U.S. 

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Sylvester Schieber has long watched these troubling trends unfold. The healthcare economist has spent more than 40 years researching and consulting on health and retirement programs, having served as research director at the Employee Benefits Research Institute before spending 23 years at Watson Wyatt. He was also appointed to the Social Security Advisory Council by the Clinton Administration, and was appointed chairman of the Social Security Advisory Board by President George W. Bush. 

In his latest book, Healthcare USA: American Exceptionalism Run Amok, Schieber dives into the challenges created by the healthcare system’s current structure, and why so much of the financial burden rests on individual consumers’ shoulders. 

He recently spoke to EBN about his data-driven approach to understanding the root cause of the healthcare world’s challenges, and dives into the specific problems that need to be solved, and the steps that must be taken toward improvement. 

Courtesy of Sylvester Schieber

This is your first book focused on healthcare, but given the course of your career, it sounds like the seeds were planted long ago. 
I’ve probably been working on it for 30 years, so I guess I’m slow. 

The first part of the book refers to the U.S. healthcare system as “a cancer on the American dream.” That’s a scary statement. What message are you trying to communicate with this book? 
Economists have argued over the years that it’s really workers that bear the brunt of the cost of employer-provided health insurance, but if you talk to the employers, they say, “You know, we’re the ones writing the main portion of the premiums, so we’re really paying most of this cost.” And that issue has never been resolved, though everybody agrees that the system is extremely expensive.

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I’ve tried to reconcile this difference in perspective. When you look at the rate of growth of compensation over time, it’s linked fairly closely to the rate of growth of productivity. But when you start to disassemble the compensation package and look at its component elements — payroll tax, health insurance, employer-sponsored retirement benefits and a little potpourri of other stuff — the last part is wages. Over time, health plan costs have eaten up a larger portion of the added compensation and left a smaller and smaller share, in terms of growth, in the wage package. 

Someone earning $30,000 who’s getting a health insurance plan that costs their employer $10,000? Well, that means that healthcare is a quarter of their total package. For somebody earning $100,000, it’s a much smaller share. So the cost of healthcare is having a larger effect on what ends up in the “cash” part of compensation for lower-wage workers. 

And in response to that trend, what have you seen? 
Employers have responded to this in various ways. When I started work, it was very common that there were folks who ran the copy room, the mail room, folks who kept the whole facility tidy and working. And those were all employees. But over time, those lower-cost employees got pushed out of employment and that work was contracted out — because those workers could be put under cheaper benefit plans. So you could reduce the cost of cleaning your facility and running your mail room. And it ultimately turned into what we now call the gig economy — we’ve contracted everything out. And these abnormally high inflationary effects on healthcare have had a dramatic effect on workers’ pay levels. 

Courtesy of Sylvester Schieber

That’s such a snowball effect of problems. What’s really driving these issues, in your opinion? 
For years, employers have been convinced that Medicare and Medicaid, these public health insurance programs, have been shifting costs to employers. But I’ve come to the conclusion that the evidence is pretty strong that it’s not cost-shifting by Medicare and Medicaid. It’s a fact that we’ve allowed the provider system — health providers, hospital systems and physicians as well — to develop monopolies or at least oligopolies in their local market. They’ve got pricing power. And the smaller the consumer unit they’re dealing with, the more they exert that pricing power. 

When you look at hospital charges, someone with employer-sponsored commercial insurance is charged two and a half times on average what someone with medicare is charged for services. In the physician realm, it’s closer to two times; in the dialysis realm, it’s three times. In the air ambulance world, it’s probably four or five times. It’s an exploitation of people with commercial insurance, and the overwhelming majority of people with commercial insurance are in the employer-insured population. 

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That’s a lot of challenges for a workforce to face. What do you see as potential fixes to create an improved system for employers and employees? 
There are people who have been arguing for some time that we need to make workers smarter consumers, and that’s part of the motivation for high-deductible plans and health savings accounts: let them have cheaper insurance, but for their first dollars, they’re going to have to spend more of their own nickels. But when someone is buying from a monopoly, the consumer still doesn’t have any leverage. Plus, about 85% of healthcare spending is spent on about 15% of the population — it’s the really big cases, and those cases are still being handled under the traditional insurance model to a very considerable extent. The idea that you’re going to have someone be a smart consumer when they’re having major heart surgery or dealing with cancer? They’re not going to be a discriminating consumer at that juncture. They’re trying to preserve their lives. So “making consumers smarter” seems to be a fool’s errand. 

So that’s not a cure-all. What other efforts have been explored, and how do you view their validity as a solution? 
The other side is to go to a single-payer system — the Bernie Sanders, Medicare for all idea. But it doesn’t seem to me that workers want to go there, and even President Biden, when he was running, said we’re not going to go to Medicare for All — first of all we can’t afford it. Another proposal is a heavier regulatory structure, and we just went through that debate with the drug benefit plan in the Inflation Reduction Act, where Medicare is going to start negotiating prices for certain drugs provided to Medicare beneficiaries. But the regulatory option is one that the provider community is going to fight aggressively. So we don’t have any happy solutions.

Which leaves us where? 
What we need to do is at least begin to change the payment structure so the providers have an interest in becoming more efficient. Most services are being delivered in a fee-for-service environment, so there’s very little incentive for providers to be effective or efficient. There are studies that show that anywhere between 25% and 40% of healthcare services that are delivered in this country are not really of medical benefit to the people who receive them. So if providers are delivering services that aren’t doing people any good, we need to focus more aggressively on how we compensate the providers. We need to engage them in risk — if they can’t keep the population they’re covering healthy, they need to be facing the risk of economic loss. 

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Are you seeing progress on that front? 
We’re beginning to move in that direction. I point to groups like Johns Hopkins, Intermountain Healthcare, Geisinger, Cleveland Clinic, who are beginning to provide services on a capitated basis. It might not be complete care, but it’s something. UnitedHealthcare has put together a very substantial provider capacity over the last several years, and they’ve got both an insurance capability and a delivery capability now, and my guess is that they are going to be moving toward a capitation system for payment with many of their clients as time evolves. There’s aggregation now, a consolidation both vertically and horizontally going on, where the provider side of the business can have a mechanism to take on more of this risk. And I think that will work closely to align the incentives to be effective and efficient. 

What are the steps to really make this kind of increased value happen? 
A number of years ago, Intermountain Healthcare decided to adapt the W. Edwards Deming efficiency model. Demings, of course, was the fellow that went to Japan after World War II and worked with industrial producers there, changing their whole concept of quality. Instead of inspecting units at the end of production, he looked at the production process itself and worked to get each step right, and the end product will be high-quality and consistent. 

Intermountain Healthcare broke down the goods and services they provided in their hospital system into something like 1,500 different activities. And they discovered that 95% of their revenue was linked to only 105 or so of these activities. So they focused on  doing a smaller set of things absolutely right — and they reduced their cost across the system, their estimate was by 13%, and they reduced their mortality level by 2,000 lives per year. 

We’ve been paying people for something we call quality, but it’s not clear they’re having that much of an effect. Instead of chasing doctors around to get them to do what they ought to be doing, I think we can get the incentives right if we take this Intermountain approach. And it’s beginning to happen, we just need to be more aggressive in terms of pushing it.