By some accounts, America’s health care system has been wildly successful. Innovative breakthroughs have transformed care around the world. As an industry, it dominates the country in terms of employment and income. But that success, decades in the making, hasn’t necessarily made Americans healthier than people in other developed nations, and now it threatens to knock the United States off its perch as the world’s economic powerhouse.
The high cost of health care that has fueled the industry’s growth accounts for about 17% of the nation’s total goods and services — or $4 trillion — and gobbles up more than 30% of federal government spending.
That outsized impact on the U.S. economy has cost consumers financially and has limited government and the private sector from investing in other areas that could help the country maintain its economic position in the world. In percentage terms, it wouldn’t take much to shrink health care’s share of the gross domestic product. Reducing it to 12% by the year 2050 could free up $1.3 trillion in present dollars annually for investment elsewhere.
But slowing the momentum of 40 years of rising health care costs won’t come easily, and it will require public and private players patiently working on solutions. While a lot is at stake domestically and internationally if these changes in the system don’t occur, panicking and moving too fast would also be a mistake. Instead, we need to reframe the conversation from election-cycle policies to generational policies with a long-term focus on decreasing costs by changing current health care business models to prioritize patients’ needs over maximizing capacity in profitable procedures.
Health care spending for individuals employers and government has more than tripled from the 1960s through 2019 as a percent of GDP, which is the sum of all goods and services produced in a year. It has grown nearly five times faster as a percent of federal spending and now represents more than a third of total government spending.
No other country comes close to the United States in that kind of spending on health care. Take China, the world’s fastest-growing economy and biggest threat to the United States’ dominance in the global economy. According to the latest World Bank figures, the U.S. spent 17% of its GDP on health care while China spent just 5.4%.
The higher spending on health care is not inherently wrong, but the challenge is in the tradeoffs — what are we, as a country, not investing in because of our increased spending on health care?
For example, based on the size of its economy and lower spending on health care, China can spend nearly $1.7 trillion more each year relative to the United States in areas such as education, infrastructure, research and development, overseas development, military, lower taxes and increased savings. We believe that the excess spending on health care puts the United States at an economic disadvantage in world markets and international influence and that reducing its cost is key to the ongoing stature of the United States.
But are Americans healthier than those living in other countries where health care costs less and is more underutilized? Studies suggest not. While China does not approach its health care systems or economy (or countless other things) in the same way as the United States, its approach has been successful at growing its economy and international relevance. China’s economy has grown two to three times faster than the United States’ in the past decade.
Most in the United States would not want to adopt China’s health care system, but a comparison in health outcomes is instructive when we consider how much is too much when it comes to spending. For example, China’s life expectancy at birth now nearly matches the United States, and its healthy life expectancy is greater than what’s experienced in the United States, suggesting that China’s approach to health care is at least adequate. In the ongoing global race for economic influence, the United States is trying to maintain its lead with a significant metaphorical health care weight around its neck.
The growth in health care took decades to occur. From 1980 to 2019, health care grew from 9% of GDP to 17%. Reversing this trend will take commitment, significant time and patience. As a country, we need to make a generational goal for how much we spend on health care. The benchmark we chose is 12% or less of GDP spent on health care by the year 2050. In present dollars, this would free up $1.2 trillion annually to invest elsewhere.
The high growth in federal government spending and the inflationary pressure that imposes on the economy would suggest Congress has strong incentives to act. Beyond health care spending representing more than 30% of the current federal budget, the Medicare trust fund is expected to be exhausted by 2026 and has significant unfunded obligations. For example, to cover those obligations over the next 75 years, Medicare would need either an additional $45.7 trillion to the trust fund now, immediately increase payroll taxes by 26% or decrease Medicare spending by 16%. The magnitude and timing of this suggest that Congress should act.
But Congress has special interests pressuring elected officials how to act. They include employers, beneficiaries and government contractors, such as hospitals and physicians, long-term care facilities and medical equipment suppliers. The size and clout of those constituencies resulted from the remarkable growth in health care during the past 30 years. Based on data from the Bureau of Labor Statistics, health care was the third-largest industry by employment behind manufacturing and retail in 1990. By 2020, it had grown 95% while retail only grew by 10% and manufacturing dropped 32%. Beyond being the largest industry in the country — both in terms of employees and income — it is also the largest single employer in 47 of the 50 states.
That kind of economic success puts Congress in a difficult bind of addressing budgetary challenges caused by health care while not wanting to hurt the economic growth that health care has generated. This dynamic has led to continued congressional gridlock around health care. And with the short-term focus of Congress and election cycles, it is unlikely to be able to find consensus around generational policies.
Governments are not the only actors that are concerned about and could address the rising costs of health care. Employers continue to see significant increases in costs (employer-sponsored family coverage now averages more than $21,000 per year). In one survey, over 80% of physicians, patients and employers thought health care spending was too high.
A critical — and often overlooked — barrier to lowering costs is the traditional business model of health care. Most business modelsconsider the value offered to the customer to determine the profit formula, which then sets requirements about what resources and processes need to be in place to make that happen.
But in health care, the real customer is not always apparent. It could be individual patients receiving care. Or, the physicians who work at the hospitals. Insurers acknowledge that they are primarily selling to employers, not the individuals. This results in the value that a customer receives differing from the value that the patient receives.
The core profit formula in health care has been fee-for-service, which is based on the idea of treating people who are sick with the expectation of healing them. This worked well in the first half of the 20th century when most medical care was transactional, and it was adopted by Medicare in 1965. Since that time, available medical care has significantly expanded; people live longer and have more chronic conditions. Much of care is no longer procedure- or transaction-based, and many patients will never fully recover from their illness but may live with them for decades to come.
Under a fee-for-service system, today’s health care delivery system optimizes revenue by identifying highly reimbursed services, increasing capacity to fulfill those services and then filling that capacity. That’s why we’ve seen significant growth of specialty hospitals, ambulatory surgery centers and hospital expansion, all which drive well-reimbursed capacity. Many believe this system incentivizes unnecessary procedures as opposed to managing care. Ultimately, the value determined by a fee-for-service system is treating people when they get sick, not preventing or eliminating illness.
An alternative business model would focus on patient needs. Under this approach, rather than starting with what’s well-compensated, providers build services and offerings around patient needs and prevent high-cost care. This model is not reliant on billing codes, office visits, acute illnesses or many of the other requirements of the capacity-focused business model.
But changing business models is incredibly difficult.
The challenges the industry and government face are not unlike a family deciding what to do with their home after finding it no longer meets the needs of their growing family. They can either repair obvious problems, remodel the existing structure or tear it down and rebuild.
In health care, we can try to repair what’s broken (increase price transparency, eliminate surprise medical bills, build new tech platforms or medical devices, increase supply chain efficiency, etc.), remodel (drive providers to change their business models toward a patient-needs approach), or rebuild (build new organizations from the ground up that have a different model for delivering care.)
None of these three options — repair, remodel or rebuild — are very attractive in the short term. Repairing does not fix the underlying issues; remodeling is uncomfortable, difficult and may not be successful; and rebuilding has yet to offer a true replacement for the system we have today. As a country, though, we are not required (and are likely unable) to solve this problem in the short term. The calculus changes significantly when you approach this as a generational strategy to change health care.
Such a strategy requires the following:
A clear goal. Transforming the health care system requires us to begin with the end in mind, with our “end” being health care representing 12% or less of GDP. While there will never be unanimity around any health care policy, getting buy-in from key stakeholders is critical. Those stakeholders are patients and taxpayers. Those with vested interests in the current system are also patients and taxpayers and need to address this issue from that perspective.
Repair, remodel and rebuild. There will always be problems to fix, but repairing alone won’t get us to our goal. Some organizations will be able to remodel while operating under the current fee-for-service system. But, ultimately, we cannot successfully reduce costs without rebuilding under a new model that adequately addresses the needs of the people at a lower price.
Government and private action. A generational transformation is never exclusively under the domain of government or industry. We imagine that much of the lower-cost business models will be developed by the private sector, but government policies can encourage the experimentation and broader adoption of successful models.
Creative destruction. When new models are developed, there will be organizations that are able to remodel and compete, and others that will go out of business. Major institutions today may not exist in a generation. While this change would be disruptive for communities, investors, employees and others if done too quickly, over time it will be more gradual and acceptable.
Patience. Fixing the health care cost issues of past generations will take significant time and effort. While there will always be a tendency to want to look at short-term impacts, we need to focus on the long-term changes and impacts. To achieve this, we will need to be patient through our failures and cautious about any short-term successes. Rebuilding the health care system to lower its cost is doable, and the time to start is now. The nation’s economic future depends on it.
Mike Leavitt, a former Utah governor and U.S. secretary of Health and Human Services, is founder of Leavitt Partners. David Muhlestein is a health care researchers and strategy consultant at Health Management Associates.
This story appears in the June issue of Deseret Magazine. Learn more about how to subscribe.
