Why American Healthcare Is So Broken

December 4th, 2024. Midtown Manhattan. Early in the morning, Brian Thompson, the CEO of UnitedHealthcare, is gunned down. Inscribed into the bullets, Deny, Depose, and Defend. A reference to the tactics used by healthcare companies to increase profits. To the media's surprise, Americans show little empathy towards the victim, and instead a country-wide discussion begins on the state of US healthcare. Today, Americans spend more on healthcare than every country on Earth, and by a wide margin. Worse yet, Americans spend more even though they see a doctor 50% less than other wealthy nations. And the cherry on top? The average US life expectancy is 3 years lower than comparable countries. What went wrong? This is US healthcare, and American sickness. The US spends nearly $5 trillion on healthcare every year. This represents almost 18% of GDP. However, for all of this money, the US gets very little, and ranks last among 10 high-income countries for health outcomes and access. Even when looking at it from a purely financial point of view, improving the US healthcare system could save Americans nearly $2.5 trillion. That's enough to exceed the mandate of DOGE in one year. To understand what's driving these high costs and poor outcomes, we need to break out the different components of the US healthcare system. Insurance, healthcare providers, and pharma. Let's start off with healthcare insurance. 92% of all Americans have some form of health insurance. Generally, it's broken down into Unlike most of the developed world, when Americans have insurance, they can select from multiple providers. This introduces choice, which some argue is nice and allows the consumer to decide what's best for them. However, it also introduces complexity. Each insurance payer can have different billing codes, payment processes, prior authorization protocols, service levels, doctor networks, pharma networks, PBMs, and more. The outcome? Providing care becomes a lot less about medicine, and much more about administrative functions. According to the AHA, 40% of total expenses incurred by hospitals are related to administrative functions. Not medicine. Not care. Not surgery. No. Admin. In fact, when you compare the US with other developed nations, 30% of the difference in cost is directly due to administrative overhead introduced by the insurance regime. But money isn't everything. To truly understand the impact, we need to look at patient outcomes. US health insurance companies deny 16% of all claims, with companies like UnitedHealthcare and Medica denying 32 and 27% respectively. This means that a doctor seeking to provide care is being rejected by an insurance company nearly one out of every five times. Ultimately, this leads to patients having to make tough decisions of paying out of pocket or not pursuing care at all. For those paying out of pocket, it could mean taking on large sums of debt, often with costs so high that 67% of all US bankruptcies are healthcare related. Or they can join the nearly 40% of Americans who have or know a family member who has delayed medical care due to cost, often paying the ultimate price. Health insurance companies argue that they do this to control costs for patients and ensure that hospitals aren't being overzealous, which is partially true. But these insurance companies are increasing the rate of From 2022 to 2023, care denials increased 20 and 56% for commercial and Medicare Advantage claims respectively. They do this because less than 1% of all claims are appealed. This isn't because patients don't believe they need care, but appealing is costly, complicated, and very time consuming. Remember, deny, depose, and defend. To make matters worse, 75% of all Medicare Advantage denials were overturned. That's 216,000 denials. The misalignment of incentives is so clear and abundant that it is shocking that this continues. It is absolutely in the insurance company's best interest to deny as often as legally possible, regardless of the claim. But let's not forget, this isn't a rejection of auto insurance. This is possibly preventing a human being in their most vulnerable state from receiving care that they need. But if we dig deeper, it continues to get worse. Prior authorizations are a form of approval that insurance companies must provide for certain types of care. This means that if a doctor requires a certain type of care for their patient, before they can proceed, they must get approval from the insurance company. Again, insurance payers claim that this is to ensure that care being provided is actually needed. But often, it leads to extremely negative consequences. For instance, 30% of radiation oncologists have had a patient admitted into the emergency room or have permanent disability due to prior authorizations. This means that a patient was prevented from getting care in a timely manner because of the administrative burden of prior authorizations and the outcome was life-changing. To receive authorization, these oncologists need to draft an explanation for the insurance companies that is reviewed by a doctor, referred to as a peer. However, 35% of these peers aren't oncologists. But this isn't solely an issue for oncology. Across all specialties, doctors claim that peers are only qualified 15% of the time. One of the reasons the insurance companies are able to behave this way is because of market concentration. 73% of commercial markets, 71% of Medicare Advantage markets, and 90% of ACA markets are considered highly concentrated. Some would argue this is a good thing because theoretically it would mean that these insurance companies can negotiate better rates with hospitals and a smaller number of payers would lower administrative burden. But in reality, this is just not true. Multiple mergers have been studied over the years, including Aetna and Prudential, UnitedHealth and Sierra, and more. When studied, the results are almost always the same. Premiums rise as the market consolidates. Instead of passing on savings to customers, insurers take advantage of their market dominance and increase prices and profits. And this competitive positioning is very hard to usurp. The barrier to entry of launching a new payer is very high due to regulatory requirements, anti-competitive practices, and scale. These insurance companies have gone a step further and have begun to vertically integrate. In 2010, the Affordable Care Act effectively capped insurance profit margins by requiring that insurers spend 80-85% of what they collect on medical services. While this sounds nice in theory, in practice it led to insurance companies seeking profits elsewhere. For example, UnitedHealth directly employs 10,000 physicians and has commercial ties to an additional 80,000. Combined, that is 10% of all American doctors. Again, this might sound nice, but as you concentrate more power into the hands of a few payers, the ability to increase prices and generate greater profits also rises. This, again, is at odds with the goal of achieving better health outcomes. The problem with the current US healthcare insurance regime is that success for insurance companies is not success for the patients. The unnecessary complexity of the regime mixed with the consolidated power of the major players has failed to lower costs or improve patient outcomes. Put simply, it is fundamentally broken. We've talked a lot about US health insurance companies, but they aren't the only reason the healthcare system is broken. Healthcare providers are also a part of the problem. Let's start off with doctors. This might be hard for some to believe, but US doctors are a major contributor to the overpriced healthcare system. Take a look at this chart. It shows the compensation for US doctors compared to doctors of other countries. There are many reasons why doctors in the US are paid more, but one of the primary drivers is the low supply of doctors. The US has 2.6 practicing physicians per 1,000 people compared to the OECD average of 3.7. But why are there so few doctors in the US? Simple. The American Medical Association artificially constrained supply. 20 years ago, the AMA lobbied to reduce the number of medical schools, cap federal funding for residencies, and cut a quarter of all residency positions because, I quote, they were worried of an impending surplus of physicians. This disgusting move of regulatory capture, influenced by greed, meant that the number of medical school graduates in 1980 was the same as 2005, even though the US population increased by 30%. Now, it isn't all the doctor's fault. Hospital groups and investors are also a big problem. Similar to insurance, consolidation in hospitals and physician practices is very common. One of the key drivers for consolidation is the high administrative burden for physicians to remain independent. Managing all the complexities of the US healthcare system can not only be time consuming, but costly. By joining larger groups, physicians are often able to avoid dealing with administrative headache that comes with a smaller practice. Over the past 20 years, there have been 1,000 mergers among the country's 5,000 hospitals. And this extends beyond hospitals. Today, 3 out of every 4 doctors now works for a corporate group or hospital. Much of this has been executed by private equity firms. The one benefit of private equity is that it generally lowers costs within practices, which should, in theory, lead to lower prices for patients. However, given patients are captive customers, private equity groups are fully incentivized to increase prices. It's the perfect investment. Based on a recent study, when PE firms control more than 30% of a market, prices rise meaningfully. Specifically, the study saw price rises of 18%, 16%, and 13% for gastro, OBGYNs, and dermatological practices, respectively. One of the most egregious examples of price rises was US Anesthesia Partners. After achieving significant market concentration in Denver, USAP was noted as charging reimbursement rates 30 to 40% higher than competing groups. By acquiring a large share of anesthesiologists in the Denver area, payers and patients had little to no choice but to pay whatever USAP asked. All of this, while USAP lowered their own costs. The saddest part? Quality of care doesn't increase, and might actually decrease. A University of Chicago study found that PE ownership of nursing homes led to a 10% rise in short-term mortality rates. Another Harvard study found that quality of care declined once a hospital was acquired by PE firms. They noted a 25% increase in hospital complications, and a 38% increase in bloodstream infections. Although this may seem surprising to some, it makes perfect sense. To maximize profits, the best course of action is to increase the revenue per patient per doctor. This operating leverage will definitely increase margins, but may compromise the quality of care. And since most PE deals are financed with large sums of debt, investors are under pressure to generate additional free cash flow to pay down the debt. This might mean cutting corners to stay afloat. But it isn't just private hospitals or PE backgroups that are part of the problem. Even non-profit hospitals are exemplifying extreme greed. For example, the former CEO of UPMC, a non-profit hospital, made nearly $13 million in fiscal year 2022. Yes, the head of a non-profit hospital made nearly $13 million. When asked about his compensation, this is what he had to say. The conclusion for healthcare providers, again, is simple. The pursuit of controlling supply has led to the ability to drive up price, without concerns for quality of care. This applies to doctors, who have artificially lowered their numbers, and clinic groups, who continue to consolidate doctors and power. The last element we will explore is pharma. The United States represents approximately 44% of the world's pharmaceutical market. That's over $600 billion. On a per capita basis, the US spends more on drugs than anyone else, spending nearly 50% more than the next highest country, Germany. But why? Is the US just buying different, better medicines? No. In fact, they're buying the exact same medicines, but just paying a lot more. When Bloomberg analyzed 8 of the best-selling drugs in the US, even after applying discounts, all but one were more expensive in the US than any other major country, and generally by a wide margin. One of the more extreme examples is for the chronic myeloid leukemia pill Gleevec, which costs $90,000 a year more in the US than the rest of the world on average. The craziest part about this though? The difference in price is not just limited to the US and other countries. Even within states and counties, people pay different prices. Take commonly used generic versions of a prostate cancer treatment, Zytiga. They have more than 2,200 prices in Medicare plans. For example, in Northern Michigan, you'll pay $815, but hop around to Lake Michigan, and it jumps to nearly $3,400. One of the reasons given by pharmaceutical companies as to the high price of drugs is R&D costs. R&D is often the largest expense for pharma companies, generally comprising 20-40% of revenues. In addition, the vast majority of all drug ideas fail, making the process to identify and commercialize a new drug extremely time-consuming and risky. However, pharma companies still generate substantial margins and returns on invested capital, as outside of R&D, these pharma companies are extremely capital efficient, and clearly, pharma companies are charging less to other countries. The main reason medicine in the US is so expensive is because unlike the rest of the developed world, the US government does not negotiate directly with pharma companies. In fact, they aren't even allowed to, as per the Medicare non-interference clause. By spreading the negotiating power across payers, the US is unable to realize the scale benefits that it has. This negotiating power was further eroded when the Medicaid Drug Rebate Program was put in place. In essence, the program set a maximum price for drugs within Medicaid, but in doing so, pharma companies made up for the lost revenue with other payers. The problem with pharma is not only about prices, but it's also about ethics. In 2014, the Open Payments Database was launched to disclose financial relationships between healthcare providers and pharma companies. Now you might ask, outside of employment, why would pharma companies pay doctors? Very simple. Pharma companies want people to use their medicines, and the only thing in their way is a doctor prescribing it. To this end, they offer illegal kickbacks and other incentives to ensure that doctors recommend their drug and not someone else's. Sadly, this behavior is on the rise. Since 2014, payments have grown from $6.5 billion to $12.8 billion. Not all of this is illegal, but in our view, almost all of it is a gray area. How can you be sure that a doctor will be objective if they have pharma companies supporting their research, giving them speaking fees, hiring them as consultants, and most atrocious of all, paying them kickbacks? There are dozens of examples of bad behavior. Novartis in 2010, Pfizer in 2014, and then more recently, Purdue Pharma with the opioid crisis. This is not a financial crime. Rather, it is a crime against humanity. The pharma system is very, very broken. Not only do Americans pay exorbitant amounts for the same drug, but they can't even be sure that they are being prescribed the right medicines. Now that was a ton of information, and frankly, we cut out a lot, including the impact of PVMs, hidden fees, price transparency, the problems with Medicare Advantage, the destruction of rural hospitals, and more. Simply put, the US healthcare system is a behemoth, and it is very complicated, but from this complexity rises extreme inefficiency and the failure to achieve the right health outcomes. That said, if you are wealthy and financially stable, the US healthcare system is likely the best on earth. The US has the most advanced technologies, the most advanced facilities, arguably the best doctors in the world. The catch? You must be able and willing to pay for it. The US healthcare system is a Lamborghini. Yes, it is capable, but at what cost? Would we accept a world where the only car you can drive was a luxury vehicle? No. Medicine is an enterprise, sure, but it's different. It's not about selling the tastiest cheeseburger, nor is it about changing your car tire so you can get to work. It is life or death. It is as human as it gets. And even if you are opposed to a government-run healthcare model, you have to admit that those models are still better than what the US has today. Not only is the US the most expensive in the world, but it also has some of the worst outcomes in the developed world. If you have watched our channel for a while, you might have ascertained that we're not exactly socialist. In fact, you might argue we are quite pro-business. But don't let that fool you. Above everything else, we care about ethics and outcomes. And to us, it doesn't matter whether the US system is public or private. The fact of the matter is, it is a disaster. It is a system that would reject care to a sick child because of prior authorization. It is a system that would increase emergency medicine fees and surprise recovering patients with an insurmountable bill. It is a system where costs continue to rise, outcomes continue to decline, and nothing seems to improve. So we must ask ourselves, is greed always good? Thank you for watching. Subscribe to 2in20 for more on business, economics, and politics.