Healthcare in America is too expensive, often difficult to access, and of inconsistent quality. As a result, although the U.S. spends more on healthcare than does any other nation, our system performs worse on several key indicators than do those of other developed countries(1). These problems persist despite significant, decades-long efforts from various groups to address them.

While there is general agreement amongst policymakers that efforts to reform our system should focus on improving healthcare access, quality, and affordability; identifying and agreeing upon the specific policies that might best achieve these goals simultaneously and equitably has largely eluded policymakers to date. There have been multiple major federal legislative efforts to reform the U.S. healthcare system over the past several decades. From the Medicare Prescription Drug, Improvement, and Modernization Act of 2003; to the Affordable Care Act of 2010; to the Medicare Access and CHIP Reauthorization Act of 2015; to this year’s Inflation Reduction Act of 2022; and many more, Congress has attempted to reform large swaths of the healthcare system through legislation, with varying results and myriad unintended consequences. Hundreds of regulations have also attempted to address and finetune the healthcare system, to say nothing of the vast and diverse efforts undertaken at the state level that have also occurred. Thus far, the healthcare system has largely responded to these reforms like the proverbial “balloon”, resisting any meaningful change in the aggregate by simply shifting displaced oxygen from one side of the balloon to another, demonstrating how deeply embedded our problems are. While there is general agreement amongst policymakers that efforts to reform our system should focus on improving healthcare access, quality, and affordability; identifying and agreeing upon the specific policies that might best achieve these goals simultaneously and equitably has largely eluded policymakers to date. There have been multiple major federal legislative efforts to reform the U.S. healthcare system over the past several decades. From the Medicare Prescription Drug, Improvement, and Modernization Act of 2003; to the Affordable Care Act of 2010; to the Medicare Access and CHIP Reauthorization Act of 2015; to this year’s Inflation Reduction Act of 2022; and many more, Congress has attempted to reform large swaths of the healthcare system through legislation, with varying results and myriad unintended consequences. Hundreds of regulations have also attempted to address and finetune the healthcare system, to say nothing of the vast and diverse efforts undertaken at the state level that have also occurred. Thus far, the healthcare system has largely responded to these reforms like the proverbial “balloon”, resisting any meaningful change in the aggregate by simply shifting displaced oxygen from one side of the balloon to another, demonstrating how deeply embedded our problems are.

It is not hard to see why the U.S. healthcare system has been so resistant to meaningful reform. The American healthcare system is incredibly overwhelming and complex with a mix of private and public health insurance coverage, an endless array of healthcare delivery models, rapidly advancing medical technologies and medicines, an evolving provider business model environment, poorly understood and opaque supply chains, and a patchwork of federal and state statutory and regulatory jurisdiction. Moreover, the dizzying array of stakeholders in the healthcare system means that there is no shortage of special interests seeking to protect or expand their revenue margins, making the pursuit of true and meaningful reform all the more challenging.

Our mission at the Institute for Health Policy Accountability (IHPA) is to identify and advance policy ideas that work to bring costs down while preserving access to affordable care that improves patient health. In furtherance of our goal, IHPA seeks to offer an unbiased, bipartisan analysis of the issues facing our healthcare system and the various policy proposals seeking to address them, with a focus on their potential impact to patients.

Let’s begin by further examining each of the major areas of concern, as well as previous efforts to address them.

Prescription Drugs

The tension between the policy goals of ensuring access to the latest and most advanced healthcare services and products versus keeping healthcare costs affordable is perhaps most acutely highlighted in the market for prescription drugs. There are over 20,000 FDA-approved prescription drugs on the market (2), and nearly 6.5 billion prescription drugs were dispensed in the U.S. in 2021— an amount that has grown by more than 2 billion over the past five years (3). More than $350 billion was spent on prescription drugs in the U.S. in 2020, a 0.8% net increase from 2019 (4). Sixty-six percent of Americans take at least one prescription drug (5), with out-of-pocket (OOP) costs for these patients totaling $77 billion in 2020— a $1 billion increase from the previous year (6). Simply put, although other areas of our healthcare system are more expensive on an annual aggregate and per-use basis (7), prescription drug costs are highly visible on a daily basis to the majority of Americans.

It should be no great surprise, then, that the perception is widely held that prescription drug costs are too expensive in the U.S. That said, the “cost” of prescription drugs means different things to different stakeholders, and the available policy options for addressing them differ depending on which costs are being discussed.

For example, from a public or private health insurer’s perspective, prescription drug costs refer to the net price they pay for a drug. Policy solutions aimed at this area of the supply chain focus on increasing transparency into prices and rebates and encouraging more competition and negotiation to lower net prices. From a patient’s perspective, prescription drug costs refer to the price they pay at the pharmacy counter, an amount that is typically determined by their health insurance plan’s formulary and benefit design. Policy solutions for this problem focus on ensuring the availability and affordability of high-quality health insurance that does not discriminate against patients who need to actually use their benefits. From a drug manufacturer’s perspective, prescription drug costs refer to the expense of bringing a new drug through the research and development (R&D) and clinical trial phases, the U.S. Food and Drug Administration (FDA) approval process, and then ultimately to market—a process that can take more than ten years and that often necessitates billions of dollars in up-front investment (8). Policy solutions aimed at this area of the supply chain might focus on modernizing clinical trial and approval processes, as well as federal policy around and support for basic and translational research.

To date, policy efforts around prescription drug pricing have focused on all of the above, with varying results and a slew of unintended consequences. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created the Medicare Part D prescription drug benefit with the primary goal of ensuring seniors have access to prescription drug insurance and affordable medicines. While Part D largely met this goal and has been wildly popular with seniors, over time the incentives created by the law have yielded perverse results that have contributed to rising drug prices for the very beneficiaries the law was supposed to serve, as well as cost shifts to the government and taxpayers. The creation of Part D also coincided with the rapid rise in market power of pharmacy benefit managers (PBMs), resulting in an even more opaque and convoluted supply chain rife with new opportunities to extract revenue from the system in ways that often lead to higher overall costs.

These unintended consequences of the MMA contributed to the passage, nearly twenty years later, of the drug pricing reforms that were a core component of the recently enacted Inflation Reduction Act of 2022 (IRA). The drug pricing policies included in the IRA are intended to address many of these issues through redesigning the Part D benefit, allowing Medicare to negotiate drug prices, and penalizing drug manufacturers that raise prices faster than inflation.

States have also been actively pursuing prescription drug reform. Twenty-one states have passed bills to require prescription drug price transparency from drug manufacturers, while another 47 states have passed bills aimed at better regulating and understanding the role of PBMs and rebates on drug costs (9). Some states are experimenting with prescription drug “affordability boards” designed to review drug spending and, potentially, to impose penalties for “excessive” pricing, while others are focusing on ensuring that financial assistance from drug manufacturers is fully realized by patients when calculating deductibles and copays owed.

Health Insurance

More widespread access to adequate and affordable health insurance correlates with higher rates of access to healthcare services and with better health outcomes . For this reason, efforts to increase access to healthcare have focused significant attention and resources toward getting as many people insured as possible while making sure that health insurance functions as it is intended to—by covering medical costs for patients when they arise. Unfortunately, these two goals sometimes conflict with one another, as policies and industry practices aimed at ensuring low-cost premiums often lead to health insurance benefit designs that do not adequately cover medical costs when patients incur them.

More widespread access to adequate and affordable health insurance correlates with higher rates of access to healthcare services and with better health outcomes (10). For this reason, efforts to increase access to healthcare have focused significant attention and resources toward getting as many people insured as possible while making sure that health insurance functions as it is intended to—by covering medical costs for patients when they arise. Unfortunately, these two goals sometimes conflict with one another, as policies and industry practices aimed at ensuring low-cost premiums often lead to health insurance benefit designs that do not adequately cover medical costs when patients incur them.

A case in point: the Affordable Care Act of 2010 was enacted to expand access to affordable health insurance, a goal that it has been highly successful by guaranteeing access to a defined set of essential health benefits (subsidized by the government), and by expanding Medicaid. However, while the law’s subsidies for individuals to purchase health insurance did much to expand health insurance coverage in America, an examination of the quality and affordability of this coverage reveals significant opportunity for improvement. For example, plan benefit designs over the past decade have shifted increasingly more healthcare costs to patients in an effort to keep premiums low, resulting in discriminatory benefit designs that penalize the sick by charging them more when they actually need to use their benefits. To illustrate, average deductibles increased from $303 on average to over $1,200 between 2006-2016 according to a Kaiser Faily Foundation analysis. That same analysis showed that over the same time frame average payments towards coinsurance rose 67% while average payments for copays fell by 38% (11). And recently, a similar study found that the “ACA’s maximum out-of-pocket limit is likely to grow faster than wages and salaries, and is also expected to grow faster than the maximum out-of-pocket limit for HSA-qualified health plans.”(12) In addition, following passage of the ACA, the Supreme Court ruled that the Medicaid expansion was optional for states, and 12 states have so far opted not to expand leaving low-income citizens of those states without access to either Medicaid or ACA insurance coverage.

States have a major role to play in regulating health insurance markets and Medicaid and have extensive experience testing policy solutions to balance affordable access with adequate benefits. In addition to enforcing many of the ACA’s requirements, states are experimenting with their own policy ideas for achieving this balance through the ACA’s section 1332 State Innovation Waivers. For example, 14 states have utilized this waiver authority to implement state-based reinsurance models to keep their ACA plans affordable (13). Colorado has used the State Innovation Waiver to experiment with a state public option plan to compete with private plans in the market (14). Several states, including Alabama, New York, and Texas, have passed laws requiring health insurers to cap patient copay amounts for certain drugs (insulin, in particular), with the federal government recently following suit through the IRA, capping insulin copays at $35 per month for Medicare patients (15)(16).

One area where federal and state policymakers alike have only recently begun to exert their statutory and regulatory oversight is the PBM market. As mentioned previously, the role of PBMs in prescription drug formulary and benefit design and management has risen rapidly over the past ten years, largely unregulated by the federal or state governments. Moving forward, it will be critical for federal and state policymakers to improve their understanding of the PBM business model and to ensure that the formulary and benefit design decisions that they make on behalf of their health insurance plan and employer clients do not discriminate against patients who need to utilize their prescription drug benefit to cover their healthcare costs.

Federal policymakers have recently taken several steps to better understand PBMs and their role in the supply chain. Congress has held a number of hearings and several bills have been introduced on the topic of PBMs (17). The Centers for Medicare and Medicaid Services (CMS) finalized a regulation requiring that certain fees that PBMs collect from pharmacists be passed through to Medicare beneficiaries at the point of sale (18). Meanwhile, the Federal Trade Commission (FTC) issued a Request for Information (RFI) and opened an inquiry into PBM practices, including whether pharmaceutical manufacturer rebates improperly incentivize PBMs to favor higher priced drugs over lower priced options, particularly in the case of insulin (19).

Following Arkansas’ passage of a law aimed at bolstering the state’s ability to regulate PBMs—which was challenged but ultimately upheld by the U.S. Supreme Court—state activity to examine the PBM market and their regulatory approach to PBMs has also increased. As mentioned above, 47 states have passed bills aimed at better regulating and understanding the role of PBMs and rebates on drug costs (20). This promises to be an area of increased interest in the legislative sessions ahead.

Providers

Healthcare providers have undoubtedly been the heroes of the COVID-19 pandemic, but one stark reality laid bare during the months in which elective healthcare procedures were halted is the degree to which these providers—and hospitals in particular—remain dependent upon the traditional high-volume care/fee-for-service business model that incentivizes the most care, instead of the best care (21). Despite years of emphasis on transitioning providers away from the fee-for-service (FFS) model and toward alternative payment models (APMs) that incentivize more accountable care, meaningful progress has been difficult to attain, largely owing to inherent flaws in the way such APMs have been designed (22). Therefore, both unnecessary care and necessary care that could be provided in more cost-effective settings of service continue to drive up costs in ways that do not lead to optimal patient outcomes—and sometimes jeopardize patient safety.

Unfortunately, several pressures on provider revenues—including COVID and its aftermath—are working against the evolution from fee-for-service to accountable care and instead leading to increased provider consolidation and higher costs . On top of lost revenue due to COVID and the shutdown of elective procedures, the No Surprises Act of 2020 (NSA) is beginning to negatively impact provider revenues (24). The goal of the NSA was to remove patients from payment disputes between health insurance plans and healthcare providers by banning so-called “surprise” medical bills to patients and creating an independent dispute resolution process for the plans and providers to use instead.

However, one consequence of removing the patient from the equation is that providers have lost a key leverage point in negotiating in-network rates with the plans. As provider payment rates have decreased in part due to this depressed negotiating leverage, it has further fueled the existing trend toward provider consolidation and, in particular, toward private equity purchases and consolidations of hospitals and physician practices to regain that leverage and extract revenue from the system in ways that increase costs elsewhere (25). This consolidation across multiple markets and states also results in less local accountability and community control over the health delivery system, and fewer opportunities for community-based care to tackle local population health needs through targeted care interventions.

Additionally, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), which created a new quality payment program alongside new incentives to move to APMs for Medicare physicians, has not encouraged the expected results (26). To make matters worse, the Medicare physician fee schedule continues to cut physician reimbursement, increasing the pressure on independent physician practices to consolidate with larger physician groups or hospital systems. For these reasons and more, hospital and physician payment models largely remain oriented toward a fee-for-service payment structure that incentivizes volume over value.

As consolidation of hospitals and physician practices marches on, the focus on profits over patients is continuing to grow in other ways as well. One example is the enormous growth in hospital purchasing of drugs through the 340B discount program, which allows qualifying hospitals and safety net clinics to access deep discounts on drugs. Because the 340B program has no requirement that 340B discounts be passed on to patients, hospitals are allowed to reap huge profits from the sale of these drugs. In 2021, 340B discounts totaled $93.5 billion, growing by nearly 16% from the previous year (27). Hospital data is notoriously non-transparent, however recent hospital transparency requirements have allowed a limited degree of analysis into how they use their 340B discounts. One such analysis found that 340B hospitals on average charge 3.8 times their acquisition cost for 340B drugs to insurers (28). Specific to cancer drugs, hospitals are charging an average of 4.9 times their cost (29). This practice results in huge profits for hospitals by driving up premiums and cost sharing for insured patients. Moreover, for uninsured or cash paying customers, 340B hospitals are generally charging them full price despite the deep discounts realized by the hospital (30) .

Our Role at IHPA

As policymakers continue to develop their understanding of the policy issues facing the U.S. healthcare system and suggest solutions to those issues, IHPA will be a trusted partner, providing unbiased and bipartisan analysis. We look forward to adding our voice to the debate!

[1] https://www.commonwealthfund.org/publications/fund-reports/2021/aug/mirror-mirror-2021-reflecting-poorly 2. https://www.singlecare.com/blog/news/prescription-drug-statistics/#:~:text=About%2066%25%20of%20U.S.%20adults,days%20(CDC%2C%202019). 3. https://www.statista.com/statistics/238702/us-total-medical-prescriptions-issued/ 5. https://www.singlecare.com/blog/news/prescription-drug-statistics/#:~:text=About%2066%25%20of%20U.S.%20adults,days%20(CDC%2C%202019) 6. Id. 7. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet#:~:text=Hospital%20expenditures%20grew%206.2%25%20to,than%20the%204.0%25%20in%202018 8. http://phrma-docs.phrma.org/sites/default/files/pdf/rd_brochure_022307.pdf 9. https://www.nashp.org/rx-laws/ 10. https://health.gov/healthypeople/priority-areas/social-determinants-health/literature-summaries/access-health-services 11. https://www.healthsystemtracker.org/brief/increases-in-cost-sharing-payments-have-far-outpaced-wage-growth/ 12. https://www.healthsystemtracker.org/brief/aca-maximum-out-of-pocket-limit-is-growing-faster-than-wages/#Cumulative%20percent%20change%20from%202014%20in%20HSA-qualified%20maximum%20OOP%20limit,%20ACA%20maximum%20OOP%20limit,%20and%20wages 13. https://www.cms.gov/CCIIO/Programs-and-Initiatives/State-Innovation-Waivers/Downloads/1332-Data-Brief-Aug2021.pdf 14. https://www.cms.gov/newsroom/fact-sheets/colorado-state-innovation-waiver-0 15. https://www.nashp.org/rx-laws/ 16. https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/ 17. https://www.commerce.senate.gov/2022/6/commerce-committee-advances-cantwell-grassley-bipartisan-bill-to-combat-rising-prescription-drug-prices 18. https://www.cms.gov/newsroom/fact-sheets/cy-2023-medicare-advantage-and-part-d-final-rule-cms-4192-f 19. https://www.ftc.gov/system/files/ftc_gov/pdf/Policy%20Statement%20of%20the%20Federal%20Trade%20Commission%20on%20Rebates%20and%20Fees%20in%20Exchange%20for%20Excluding%20Lower-Cost%20Drug%20Products.near%20final.pdf 20. https://www.nashp.org/rx-laws/ 21. https://www.shvs.org/is-covid-19-the-end-of-fee-for-service-payment/ 22. https://www.ama-assn.org/about/leadership/time-pursue-patient-centered-payment-models-designed-doctors 23. https://www.kff.org/health-costs/issue-brief/what-we-know-about-provider-consolidation/ 24. https://www.aha.org/news/blog/2021-12-09-blog-why-hospitals-and-physicians-are-filing-suit-over-no-surprises-act-final 25. https://www.nbcnews.com/health/health-care/private-equity-firms-now-control-many-hospitals-ers-nursing-homes-n1203161 26. https://blog.healthmonix.com/mips-disappointed-but-it-all-changes-in-2021 27. https://www.iqvia.com/locations/united-states/blogs/2022/04/340b-program-continues-to-grow-while-contract-pharmacy-restrictions-take-effect#:~:text=340B%20sales%20grew%2015.9%25%20year,340B%20program%20growth%20by%20year. 28. https://communityoncology.org/featured/hospital-340b-drug-profits-report-feb-2021/ 29. https://communityoncology.org/featured/examining-hospital-price-transparency-drug-profits-and-the-340b-program-2022/ 30. Id.