Fixing Health Care's 'Leaky Pipes' Could Save the U.S. $340 Billion
February 11, 2021
The U.S. health care system is full of wasteful spending. A group of top health economists say a bunch of small changes could save the country big money.
Listen to the full episode, read the transcript below or scroll down for more information.
Dan Gorenstein: It’s no secret that the U.S. spends a tremendous amount of money on health care.
$3.8 trillion in 2019.
And estimates suggest as much as a quarter of that is waste — leaks in the system.
Think of what we could do if we got back even a little of that spending.
Zack Cooper: You could spend it on more education, more public infrastructure. You could spend on a huge drop in taxes.
DG: Today, how a bunch of small changes could save the U.S. big money on health care and what it would take to actually make it happen.
From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein, and this is Tradeoffs.
DG: Zack Cooper is an associate professor at Yale and one of the most well-known health economists in the country.
But maybe his true calling? Plumbing.
ZC: There are just all these leaky pipes across the health care system, which, if tightened, would make the system run more efficiently, would lead you to save money.
DG: Economists as plumbers.
ZC: I wish it were my line. It’s actually a line of Esther Duflo who won the Nobel Prize.
Esther Duflo: I tend to think often we are not spending enough time on plumbing issues.
DG: Zack is open to big changes in health care.
But the reality is our political system makes it tough to deliver major overhauls.
In the last 50-some years we’ve just seen a few: Medicare, Medicaid and the ACA.
So he figures while we wait for the stars to align, might as well tweak, adjust and tighten the system we already have. You know, plumbing.
ZC: We got some of the smartest health economists in the country to identify from their research discrete problems that have discrete solutions and put forward the steps to fix them.
DG: They’re calling it the 1% Steps Project, which is funded in part by Arnold Ventures, one of Tradeoffs financial supporters.
The project includes 16 evidence-based policy proposals that solve mostly wonky, technical health care problems.
Eliminating wasteful spending — one percent here, half a percent there. Ideas that would leave more money in the pockets of taxpayers and the government.
Add them all together and the savings start looking pretty impressive.
ZC: Let me let me get a calculator, and I’ll get it for you. It’s funny when you write trillions, how many zeros there are. Yeah, and it’s going to be $340 billion.
DG: $340 billion.
That’s a lot of money dripping out of those leaky pipes.
So we asked Tradeoffs producer Ryan Levi to get under the sink and help us understand some of these proposals.
Ryan, you got your wrench?
Ryan Levi: I am actually the last person you would want near any plumbing problem. But I’m pretty good with a mic, so I called up a few of the economists and talked to them about their ideas.
DG: I know plumbers —and some economists — charge by the hour, so let’s keep this short.
How about 5 minutes to run me through a few of your favorite ideas?
RL: Perfect, let’s do it.
DG: Alright, clock starts in 3, 2, 1.
RL: Okay let’s kick it off with an idea from Mario Macis, an economics professor at Johns Hopkins.
Mario Macis: There is a severe shortage of kidneys for transplantation in the United States, so there’s a large waiting list and every year about 6,000 people either die while on the waiting list or drop out because they are too sick to receive a transplant.
RL: People waiting for transplants get dialysis where a machine filters and purifies their blood. This is very time consuming and expensive, and almost all the costs are paid by Medicare.
An obvious fix here is to get more people to donate kidneys, right? But Mario says there’s actually a bunch of financial barriers for people who want to donate, and his solution would be to make those barriers go away.
MM: It would be a comprehensive set of measures that would remove all financial disincentives to living kidney donation.
RL: He would have the government reimburse all of donors’ costs for things like travel, child care, lost wages. He would give them insurance to cover any short- or long-term medical issues from the donation. And finally a tax credit, say $5,000, to make up for any anxiety and pain that comes with donating.
DG: Okay, Ryan, two questions. How many more people would get kidneys in the United States if we did this and how much money would that end up saving the federal government?
RL: Mario says this could generate an additional 12,500 kidneys a year, which is about three-quarters of the annual shortage. And because transplants actually end up costing a lot less than dialysis in the long run, he says his plan could save $1-3 billion a year.
Now on the flip side, that money would be coming out of the pockets of the dialysis companies, which they’re probably not going to like.
And Mario says while pretty much everyone agrees donating a kidney shouldn’t cost you money, there are some ethical concerns.
MM: There is a concern that if we reimburse costs that have an element of subjectivity, for example, to compensate for risk or pain, we would slip from a world where we compensate for costs to a world where we are paying for a kidney.
DG: Okay that’s 2 minutes. Clock’s ticking, man. Tick tock.
RL: Okay let’s got to an idea from Yale economist Fiona Scott Morton that has to do with trying to increase generic competition for expensive drugs called biologics.
A little background here — biologics are complicated to manufacture. They’re usually administered in a doctor’s office and treat conditions like rheumatoid arthritis and certain cancers.
There are cheaper generic versions known as biosimilars, but Fiona says a lot of doctors aren’t buying them.
Fiona Scott Morton: It makes no difference to their income which one they use. They have no incentive to prescribe the cheaper drug.
RL: So, Dan, here’s a very, very basic example.
Say Dr. Walker buys a biologic for $100 dollars. Medicare will reimburse her $100 plus a $6 profit.
Now if she buys a $50 biosimilar, Medicare reimburses $50 plus that same $6.
So either way, she’s making $6.
Now under Fiona’s plan, Medicare would pay Dr. Walker the average price of the biologic and biosimilar, which would obviously be less than the $100 that biologic costs.
FSM: And what that means is that you, the doctor, should look out across all those competitive options and buy one that’s cheaper, if you want to make money administering the drug.
RL: And Fiona says when Medicare has done this with non-biologic drugs in the past, it forced the brand name drugmakers to lower their prices.
DG: And what kind of savings are we talking about here?
RL: It depends on how many biosimilars enter the market and how much cheaper they would be, but Fiona says a conservative estimate is anywhere from $2-7 billion a year.
DG: And like the dialysis companies in the first example, biologic drug makers would be the big losers here, because that $2-7 billion is coming out their pockets.
DG: Okay, one minute left. Can you do one more?
RL: Yeah let’s talk LTCHs.
DG: I’m sorry, what?
RL: LTCHs. These are long-term care hospitals, places people can go after they’ve been in a regular hospital but aren’t quite well enough to go home. They provide basically the same care as a skilled nursing facility or nursing home, but because of a 40-year-old loophole, Medicare reimburses these LTCHs at three times the rate as nursing homes.
We talked with Neale Mahoney, an economist at Stanford, and he says these LTCHs are literally a case study in waste. That’s his quote. He says closing this loophole and paying the 400-some LTCHs the same as nursing homes could save about $4 billion a year.
Neale Mahoney: There are many areas in the United States where there aren’t any long term care hospitals. And in those areas there aren’t worse patient outcomes. If one of these LTCHs shows up, it’s not that patient outcomes get better. It’s just that costs go up.
RL: Now, even though outcomes are the same, there is one big thing LTCHs do that nursing homes generally don’t. That’s ventilator care.
And if some of these LTCHs close or stop offering ventilator care after their reimbursement gets cut, Neale says some patients might have to stay longer in regular hospitals before going to a nursing home, which could cost those hospitals some money.
DG: And what about COVID? I mean obviously these LTCHs are probably playing a really important role right now.
RL: That’s definitely the hospitals’ argument, and it could for sure make it a tough political sell right now. As could lobbying from LTCH investors who stand to lose billions if this goes through.
DG: And time!
RL: How’d I do?
DG: Well you were a little closer to 6 minutes, but I think you saved the U.S. health care system like $15 billion, so I think it’s alright. Pretty good for a plumber-producer.
Thanks for doing this, Ryan.
RL: Happy to do it.
DG: When we come back, we get a political reality check, try to hop on a moving train, and a case study.
DG: Welcome back.
The argument for the kind of technical, wonky solutions that we’ve been talking about makes a lot of intuitive sense.
They’re drawn from research, expected to save money, and are less controversial than overhauling prescription drug costs or creating a public option.
Elizabeth Fowler: Does it make it more likely to happen if it’s small things versus big things? You know, it depends.
DG: Elizabeth Fowler is the executive vice president for programs at the nonprofit Commonwealth Fund.
She spent nearly a decade as a top health policy staffer on Capitol Hill, so she knows what it takes for an idea to become law.
On one hand, she says building a pipeline of these kinds of smaller ideas is critical.
EF: That’s the way that you’re going to fix the health care system, because I don’t know how you’re going to get another big ACA done. So I can see why you’re gravitating to smaller things. But you have to put it in the context of the bigger picture and the legislative landscape.
DG: Elizabeth says it can be really hard for a small, complicated health policy fixes to compete with other congressional priorities and get the 60 votes you need to pass most legislation through the Senate.
That’s especially true if there’s a powerful health care interest — like dialysis companies or drug markers — that could lose a lot of money.
EF: If something is universally accepted and we’re just going to move it through and you can pass it by unanimous consent, boom, you’re done. But if somebody objects and you’re going to have to use floor time, which is very valuable, you’re not going to burn your floor time on one little bill.
DG: Elizabeth says the best way to get these ideas into law is by attaching them to a bigger piece of “must-pass” legislation.
EF: We used to call it a moving train.
EF: So something that had to get done that you could attach something to.
DG: We’re seeing this right now with Democrats trying to include tweaks to the ACA and Medicaid in their $1.9 trillion COVID relief package.
And this is exactly how Congress finally passed surprise bill legislation in December.
Lawmakers tucked that into the big end-of-year measure that had to get done to fund the government.
It was also one of Zack Cooper’s “1%” solutions and a pretty good case study of this approach to health policy.
Surprise bills checked all the boxes Elizabeth says you need to get a health care law through Congress.
EF: You need a strong case for policy change. Is there evidence showing that this is a problem?
EF: Public opinion in support of a policy change.
EF: You need policy options.
EF: You need congressional and executive leadership that are willing to see it through and get it done
DG: Even with all that, a fix took five years to make it through Congress as private-equity backed physician groups spent tens of millions of dollars fighting the legislation.
But in the end, it passed, and that suggests to Zack what he’s trying to do can work.
ZC: Do I think it’s easy? No. But I think it begins to shift the conversation to more concrete proposals as opposed to just sort of broad debates about the role of government and broad debates about, I think, fairly ill-defined interventions.
DG: Zack hopes that by injecting some tangible ideas that are backed by research into the conversation, he and his fellow economists can convince some lawmakers to grab their wrenches, duck under the sink and get to work.
I’m Dan Gorenstein, and this is Tradeoffs.
Want more Tradeoffs? Sign up for our weekly newsletter!
More Information on the 1% Steps for Health Care Reform Project:
Health Care Reform: One (Percent) Step At A Time (Zack Cooper and Fiona Scott Morton, Health Affairs, 2/10/2021)
Long-Term Care Hospitals: A Case Study in Waste (Liran Einav, Amy Finkelstein and Neale Mahoney; 1% Steps; 2/10/21)
Paying for Biologic PADs in Medicare Part B (Fiona Scott Morton, 1% Steps, 2/10/2021)
Removing All Financial Disincentives to Living Kidney Donation (Mario Macis, 1%, 2/10/2021)
Selected Research and Reporting on U.S. Health Care Spending
CMS Office of the Actuary Releases 2019 National Health Expenditures (Centers for Medicare and Medicaid Services, 12/16/2020)
The Huge Waste in the U.S. Health System (Austin Frakt, New York Times, 10/7/2019)
Surprise Medical Bills Cost Americans Millions. Congress Finally Banned Most of Them. (Sarah Kliff and Margot Sanger-Katz, 12/20/2020)
Zack Cooper, PhD, Associate Professor of Public Health and of Economics, Yale University
Mario Macis, PhD, Professor of Economics, Johns Hopkins Carey Business School
Fiona Scott Morton, PhD, Theodore Nierenberg Professor of Economics, Yale University
Neale Mahoney, PhD, Professor of Economics, Stanford University
Elizabeth Fowler, JD, PhD, Executive Vice President for Programs, Commonwealth Fund
The Tradeoffs theme song was composed by Ty Citerman. Additional music this episode by Blue Dot Sessions and Sample Focus.
This episode was reported, produced and mixed by Ryan Levi, with assistance from Leslie Walker and Andrew Parrella.
Additional thanks Nikil Agarwal, Leemore Dafny, Amy Finkelstein, Theda Skocpol, Amanda Starc, the Tradeoffs Advisory Board and our stellar staff!