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COVID-19 has only magnified well known flaws of our healthcare system. An extension of Medicare is the affordable solution, writes Bruno Delagneau, and pharma needs to start planning for this to minimize its impact on US revenues.
A recent article published in The Journal of the American Medical Association highlights how COVID-19 has magnified the systemic inequalities, racial and socioeconomic, in the US healthcare system. These are many: higher rates of uninsurance or underinsurance among African American and Hispanics, less testing, limited access to aprimary care physician and specialty care in low income neighborhoods, to name a few. The pandemic has also highlighted the excessive costs of our system: median charge for COVID-19 hospitalization is $42,000 and for those with insurance, the average out of pocket cost is $1,300, hardly trivial when in most countries with universal healthcare it is $0.
The US healthcare system is the most expensive of all OECD countries: $10,000 per capita, three times the OECD average and twice as much as Germany, the UK, Canada and France. Surely at this price, the US should be leading on all health indicators. Surprisingly, it doesn’t. Instead, the US has one of the lowest life expectancies of all OECD countries, peaking at 78 years average versus 81 or more in the UK, Canada, France or Germany. It ranks in 33rd place in infant mortality with 5.9 deaths per 1,000 life infant births versus 3.9 for the average and is simply at the bottom when it comes to obesity.
One explanation for this poor showing is that the US's current healthcare system relying on employer-based insurance leaves too many people behind. According to the Congressional Budget Office (CBO) and the Commonwealth Fund, 30 million people are uninsured. And among those insured, 29% or 80 million are underinsured. Those individuals don’t have access to prevention measures, avoid regular check-ups, delay seeking medical attention, check into emergency departments when illnesses are well advanced, and struggle to pay medical bills. With 110 million people receiving suboptimal medical care, it’s no wonder we fare worse than other well-off countries on all health indicators.
For those with insurance, costs continue to increase at an alarming rate. The average family premiums are now $21,000 per year — $7,200 for single coverage — according to the Kaiser Family Foundation. One third of this is paid bythe employee. Out of pocket expenses are also going up reaching an average of $1,200 per year. This expensive employer-based system is also ill-equipped to deal with significant economic downturns. Thanks to the COVID-19 pandemic, more than 30 million people are now unemployed and at risk of losing health coverage.
Reforming our healthcare system so that it can weather economic downturns, be more affordable, provide universal coverage and limit systemic inequalities needs to be a priority. The Affordable Care Act (ACA) has failed to address these issues: too many are still without coverage or underinsured, and it had no impact on costs. Proposed by some, an extension of Medicare is an appealing cost-effective option, which merits further discussion.
Born in 1965 along with Medicaid, Medicare is currently covering older individuals, people with disabilities and people with end stage renal disease, or roughly 62 million. According to the CBO, 99% of Medicare revenues go to benefits payments and only 1% is spent on administration, making it a very efficient system especially compared toprivate health insurance spending up to 20% of premiums on administrative costs.
Two groups are primary targets for a Medicare extension. Group 1 — 57 million individuals without insurance orinsured independently (ACA basic, ACA Medicaid, nongroup-exchange ACA and other nongroup insurance) and group 2, 46 million people underinsured through their employer-based insurance. We estimate that a total of $205 billion/year would be needed to cover group 1 and $165 billion for group 2, equivalent to about $3,600 per person per year or $300 per month.
Considering that Medicare expenses were $795 billion in 2019 — 40%, 47% and 13% respectively going to part A(hospital services), B (medical services) and D (drug benefits), part C (Medicare administered by private plans) being counted in A and B-, those estimates can be seen as low. However, they rely on two key assumptions. First, healthcare costs are three times lower for working age adults compared to seniors according to the Center for Medicare and Medicaid Services (CMS) and second, Medicare is allowed to negotiate drug prices in a manner similar to Medicaid which benefits from two statutory rebates. This reduces drug benefits expenses by about 45% for both seniors and new beneficiaries, a measure that would have a significant impact on pharmaceutical revenues.
There are many potential options for paying for these new enrollee expenses, but we propose a couple that do notrely on general revenue transfers. Since the CBO estimates that increasing Medicare tax withholding by 2% would generate an additional $161 billion in 2020, group 1 expenses can be covered by a combination of small premiums and an increase in Medicare withholding. For example, a premium of $144 per month per person — the current average premium in today’s Medicare — and a marginal 1% increase in the Medicare withholding rate would almost cover the new group’s expenses. Small co-payments and co-insurance could fill the tiny remaining gap.
Group 2 financing can be modeled after group 1 but since businesses would be saving on private health insuranceexpenses, employers could be fully responsible for the additional cost.
This Medicare extension could also solve the excessive cost of today’s healthcare system. In the US, an MRI costs four to five times more than in other countries — same equipment, same education for technicians and physicians, same time spent in the radiology room. A visit to an emergency room in Italy in 2017 for 15 stitches on a leg wound — tetanus shot andantibiotics included — only cost me €150 with no local insurance! In the US, according to various studies, it’s a minimumof $2,500. Clearly, there is a lot of price flexibility in our system. Because of the sheer size of this new Medicare, betterprices for in-hospital care and medical services can surely be negotiated, thus lowering total costs even further.
These cost reductions would benefit all enrollees, lowering premiums, co-payments and co-insurance.
The proposed coverage, similar for all enrollees, would be independent of income, minimizing racial and socialinequalities. Individuals that cannot afford the premiums and/or co-payments and co-insurance could get some type of supplemental insurance through Medicaid, like today. In the case of unemployment, people would keep their Medicare insurance since they would no longer be tied to an employer-based system. With comprehensive healthcarecoverage, people will be more likely to seek medical care when needed, have access to prevention measures, thusensuring better health and wellness. As a result, overall health outcome indicators will also improve overtime.
COVID-19 has only magnified well known flaws of our healthcare system: too many uninsured and underinsured, rising costs making it less affordable to employees and employers, systemic inequalities, and automatic loss of coverage forthe newly jobless. An extension of Medicare is the affordable solution to our current healthcare problems. Pharma needs to start planning for this change to minimize its impact on US revenues. Price negotiations by Medicare will be the new normal. Value-based pricing is likely to play a larger role and yearly price increases will be limited to the CPIat best.
We only explored a couple ways of financing this extension but there are many other options which can be explored and debated. Reasonably easy to implement, a Medicare extension could also be up and running quickly.
In 1965, the creation of Medicare and Medicaid was a bold bi-partisan move that secured healthcare coverage forsenior citizens and the poor. Can we be as bold today and secure universal, comprehensive healthcare coverage for all Americans? We clearly need it.
Bruno Delagneau, BDA Consulting.