Silent Clues to Fixing Healthcare

Silent Clues to Fixing Healthcare

Hey, President Trump,

To fix the Healthcare mess, listen to the dog that didn’t bark!

Dr. Grant Bagley & Wes Chapman

July 4, 2017

Preface: This is the first in an occasional series of articles looking at selected healthcare policy issues best addressed by the famous conundrum of the “Dog that didn’t bark” in the 1892 collection of short stories, Memoirs of Sherlock Holmes, by Sir Arthur Conan Doyle. The story “Silver Blaze,” is a mystery about the disappearance of a famous racehorse and the murder of the horse’s trainer. Sherlock Homes solves the mystery in part by recognizing that no one he spoke to in his investigation remarked that they had heard barking from the watchdog during the night – the absence of the expected is the clue to the mystery. We propose, and hope to convince the reader, that to solve the mess unfolding around the repeal/collapse of ACA (Obamacare), don’t listen to the howls of partisans and media. Instead look for policy solutions in the silence – where the dogs don’t bark.

In the late spring of last year, just before the Republican convention, we were invited to present to the Trump campaign (at the Cabinet Secretary level) regarding the best healthcare policy for the Republic under a Republican Administration. This was a treat to put together, and a fun presentation to make – it’s not often that you can imagine a White House beholden to nobody, with a clear but inchoate mandate for change. And we were proposing the framework to contain and direct that change – for over $3.0 trillion in annual expenditures.

Our initial premise was pretty simple, US healthcare is the most expensive among comparable nations, with the lowest quality. In simple terms, we spend 17% of our GDP for healthcare, and rank dead last among 11 comparable countries in terms of quality. Our suggestion was pretty simple, let’s take a look at what these other folks are doing and learn from it.

In the US, we pay a lot for healthcare…

And we don’t get much to show for it.

Much has been made (including recently by President Trump himself) that healthcare is a big complex mess – and therefore defies simple solutions – something that we disagree with entirely. FDR boiled down the situation in WWII (a fraught situation if ever there was one) to a very simple mission, “Germany first, then Japan”. Our presentation boiled down to a simple aphorism, “Use our best, copy the rest”.

In our discussions with the Trump folks, we listed the political realities into which any policy solution had to fit:

  • Nothing that we proposed could be construed as government sponsored “Universal Coverage”, required of all Americans, and limiting competition within the system,
  • There actually is universal coverage via a spectacularly bad piece of legislation called EMTALA, which dumps the uninsured in the emergency rooms of American Hospitals. This unfunded mandate passed in 1986 has dramatically complicated all healthcare funding ever since, and our proposal needed to address this effectively – one of the few clear accomplishments of Obamacare, and
  • The treatment by Obamacare of pre-existing conditions, family coverage (adult children covered until 26) and limitations on premium pricing for older Americans were extremely popular and would need to be maintained in a sustainable pricing structure.

Next, we took a look at the operational/functional realities that any proposal to replace Obamacare would need to accommodate:

  • All Americans covered by this program would need to be ensured of adequate coverage of medical conditions (policy design), serviced by a nationwide network of doctors and hospitals willing and capable of providing care,
  • Providers would need to be offered an acceptable fees schedule, designed to contain costs but providing adequate compensation to ensure participation,
  • The system would need to be capable of quickly and accurately enrolling millions of new beneficiaries as the Obamacare policies unwound,
  • The payment controls would need to be bullet proof and stable – this involves handling a lot of money, and mass failures like the healthcare coops could not be tolerated again, and
  • Public trust needed to be regained. The politics associated first with the passage of Obamacare, and then its repeal smelled to Americans like a bunch of grandstanding politicians playing politics with their health.

Our proposed solution was the non-barking dog – allow Americans to purchase healthcare coverage through Medicare. Contrary to all public discussion, the largest player in American Healthcare – Medicare (CMS) – is by most measures, an effective and successful organization. CMS is vastly more efficient in controlling medical spending (almost twice as effective in cost control) and administrative costs (as measured by overhead %; 2.5% CMS vs. 12.5% private average) than the private payers in the US. CMS also has the highest accuracy of payment of any insurance company (98.1%), as measured by the AMA.

Medicare excellence in cost control

Medicare limits per capita cost growth

So, back to our aphorism – it appeared to us that Medicare is by far and away the best part of system that we have to work with in healthcare payment reform – “Our Best” is clearly CMS. Now there is a dog that doesn’t bark much.

And for the national systems that we looked at, Switzerland and Australia were both interesting, and had more in common than you would first surmise.

Switzerland restructured its healthcare system in 1996 into 100% coverage, no pre-condition exclusion, Obamacare style, putatively structured as 100% free market. But in reality, it is a negotiation between two cartels, the providers on one hand, and the insurers on the other – with a minor amount of political interference at the national and Canton levels. The fundamental message, bi-lateral negotiation can produce low costs and great care.

Australia is a typical post-war Anglo model, with a national insurer (Australian Medicare) providing universal coverage, and coverage also available through private insurers. While complicated and messy, the system generally delivers high quality care to all Australians, but with the clear distinction of access and perceived quality available through private insurance. Like in Switzerland, the Australian model is fundamentally a bi-lateral negotiation between two cartels, with both parties incentivized to push beneficiaries out of the government system and into private insurance. The fundamental message; in a laissez-faire Anglo country, a government led payer can produce low costs and adequate care, with excellence and timeliness available to those willing and able to pay for it through private insurance.

So what was our proposal? Simple:

  • CMS is paid for by US taxpayers, why not let them use it? By all accounts Obamacare failed/is failing as a private initiative. We have a terrific public alternative why not use it? Like the Swiss system, you need to buy in, paying real money. Like the Australian system, we can subsidize that purchase for the poor – a societal decision and matter of public policy.
  • CMS is prohibited by law from negotiating on its own behalf for acquisition of drugs and devices. Can you imagine why they might be so much more expensive than in Switzerland or Australia where there is organized price negotiation? We have a master deal-maker in the White House, let’s let him do his stuff. Perhaps it would be to everyone’s benefit if we all heard that dog bark.

So what does this mean for potential savings? First consider the table below.

Let’s pick as a target group the 45-64 year old cohort covered by private insurance (Table 1). We pick these people, because they are the problem from an actuarial perspective – they are old, and cost insurers twice as much as the 18-44 year old group ($7,131 vs. 3,290). Based on CDC and census data, we estimate that about 70 million of these people are covered by private health insurance – generating total costs of around $500 billion in total insurance costs per annum.

Let’s see what the costs would be if these people were transferred to Medicare. First, CMS typically pays about 80% of private payers (based on our experience). Second, private insurers always have more overhead associated with their operations – a minimum might be 10% more. Finally, we are counting on the Negotiator in Chief to reduce costs of pharmaceuticals and devices by 35%. Since these are about 15% of total US medical costs, we will assume around 5% reduction of total costs.

Doing the arithmetic, we are projecting a 35% reduction in costs moving these folks to Medicare – and they (or their employer) are paying for every nickel. So, we saved this cohort 35% of $500 billion, or $175 billion. I’ll bet that the voters would remember that next November – remember, the money that we saved was theirs, not the Government’s.

Finally, should the Government ever decide to lose its fright of confronting big pharma, it might consider extending price negotiations on drugs and devices to the programs it pays for directly. It could save and estimated $50 billion – enough to offset about 40% of the annual costs of Obamacare as currently constituted.

Our proposal does absolutely nothing to limit the opportunities of private insurers. They can match the CMS public policies if they want, or perhaps innovate in new policy formats – much like existing Medicare Advantage plans. Private insurers will have the opportunity to transform and update their business as they see fit. As an example, we would expect to see innovative and successful product development to cover deductibles and co-pays, much like Medicare supplemental policies do today. We want to use CMS to do what it does best, provide low cost, high quality health insurance – in this case paid for by individuals instead of the government.

These proposals are the dog that didn’t bark. Nobody talks about what a great job Medicare does, or why we outlawed our ability to negotiate price for drugs and devices. The fiscal savings proposed here should appeal to Republicans, and the use of public entities like CMS should appeal to Democrats. It is probably the only alternative that can be effectively implemented before the whole system blows up next fall, when the insurers need to file their rate proposals for next year. Finally, it is the only alternative that will actually reduce costs to both government and taxpayers – and who doesn’t like that?


I’d like to thank my friend and teacher, Grant Bagley, for his thoughts and help in pulling this blog together. As always, it’s been a lot of fun. Grant’s brief bio is shown below.

Grant Bagley, MD, JD:  Health Policy analysis and strategic planning.  Career has included medical school and nursing school faculty, fellowships in health policy and bioengineering, 10 years in Federal Government, FDA and CMS (Medicare), and a ten year health policy practice in a Washington DC law firm. Presently consulting on health policy reform and health care industry forecasting.

Wes Chapman
Written by Wes Chapman

2 Comment responses

  1. Avatar
    August 02, 2017

    To what do you attribute Government’s “fright of confronting big pharma”? To a mere layman living in the donut hole for seven months a year, it certainly looks like the PBMs and insurers are being bought off, but since none of these players is willing to disclose in whose hands all of my cash ends up, it’s impossible to say. I certainly wouldn’t mind having the buying power of CMS brought to bear on my behalf. Perhaps Congress will develop some brass ones and authorize a little confrontation.


    • Avatar
      August 03, 2017

      Bill, it is perplexing to me how the fear of pharma developed – I suspect that there have been some deals cut around programs like 340B that would need to be unwound before legitimate negotiations facing drug pricing can be established. Wes