As we embark upon a contentious debate over changing the Affordable Care Act, lost in the rhetoric is that the central problem in US healthcare is that healthcare costs too much.  If premiums were lower, more young healthy people would have purchased insurance, premium increases would be lower and more manageable, and wage growth and state budgets would not be consumed by healthcare cost growth. 

While healthcare costs have grown at historically slow rates for the past 5 years, there is still about $1 trillion in annual wasteful spending.  Imagine if the ACA wrung out that waste as opposed to merely slowing cost growth?  In theory, we could have a decade of negative premium growth, making healthcare increasingly affordable.  The hitch is that reducing costs is hard and unpopular. 

The $1 trillion in waste represents cost to government, employers, and consumers, but revenue to someone in the health system.  And most players, outside of drug makers, have very low margins and high fixed costs.  Moreover, since the health system is the largest engine of job growth in America – particularly high wage jobs with benefits – many policy makers are wary of policies that could lead to less hiring.  As a result, over the last 20 years, we have experienced zero labor productivity growth in the health system. Labor expenses now represent about two-thirds of US healthcare spending – by far the biggest category of expenditures (http://www.nejm.org/doi/full/10.1056/NEJMp1109649#t=article).   

While drug prices get lots of attention, the real reason for high costs is that our health system either has too many people or pays people too much.  Most of these people work in hospitals and large health systems.   Fortunately, more than half of all healthcare jobs in America are non-clinical, offering the prospect of reducing costs without eliminating jobs that touch patients directly.  Hopefully technology will be developed to reduce administrative costs in healthcare as it has in other sectors, leading to better products at lower prices.

As we debate the ACA, we need to realize that there is no alternative that can cover an equal number of Americans more affordably unless it’s more effective in tackling the drivers of healthcare costs. 

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Author

Bob Kocher, M.D.
Partner, Venrock
Bob Kocher is a Partner at Venrock and focuses on healthcare IT and services investments. He currently serves on the Board of Jiff, Aledade... Read Bio