Hal Andrews | July 3, 2024

How Congressional Tyranny Constrains Value for Money in the Health Economy

The men who signed the Declaration of Independence 248 years ago were deeply serious and courageous, transparently articulating their many grievances against King George’s tyranny. Tyranny is a strong word, which Merriam-Webster defines this way: “oppressive power, especially oppressive power exerted by the government.”1  

It is axiomatic that you become what you hate, and Congress has, if unwittingly, tyrannized the American public through two landmark enactments:  

  • the Internal Revenue Code of 1954, which made employer contributions for health benefits tax deductible as a business expense and excluded from employees’ taxable income, perhaps a logical outcome of the War Labor Board’s 1943 ruling that employer contributions to health insurance did not count as wages;2,3 and  
  • the implementation of medical loss ratio (MLR) requirements in the Affordable Care Act (ACA).4  

The consequence of these two acts of Congress is that value for money in the health economy is elusive and random, which in the case of the ACA may be a feature and not a bug. 

Channeling my inner Marshawn Lynch, I have written over and over and over about the health economy’s proof of Sir Isaac Newton’s Third Law of Motion: for every action there is an equal and opposite reaction. Hindsight is 20:15, but the War Labor Board’s ruling catalyzed most of the “healthcare waste” lamented in the ivory towers of Ivy League economics departments and Beltway policy shops, manifesting in mercenary relationships between brokers, benefits consultants and payers at the expense of employers and consumers.  

“In a war economy with labor shortages, employer contributions for employee health benefits became a means of maneuvering around wage controls. By the end of the war, health coverage had tripled…Between 1950 and 1965, employer outlays for health care rose from 0.5 to 1.5 percent of total employee compensation.”5 

The waste incubated by the distinctly American employment-based health system was supercharged by the ACA’s MLR provisions that codify minimum percentage spending thresholds, thereby disincentivizing any focus on cost-containment. Other than gross incompetence, which is uncharacteristic of the payer industry, only the perverse “cost-plus” aspects of the ACA can explain this graph: 

UnitedHealthcare Negotiated institutional rates for MS-DRG 291 at Select short-term acute care hospitals, March 2024

Of course, reimbursement rates are only part of the story. Value for money exists at the intersection of quality and negotiated rates, i.e., what the provider receives, not what the provider “charges.” Once again, mortality is the ultimate measure of quality as the legendary British epidemiologist William Farr reminds us: “Death is a fact; all else is inference.” 

A picture is worth a thousand words, but a thousand words are not enough to explain why there is no observed correlation between quality and negotiated rate for DRG 291 – Heart Failure, the highest volume medical DRG in the health economy. In each correlation analysis below, the X-axis represents quality, and the Y-axis represents the in-network rate, for which a lower number is better for each axis. As a result, in these correlation analyses, the ideal correlation would be -1, which would demonstrate that as the rate increases, so does quality. Conversely, a correlation of 1 would demonstrate that as rate increases, quality decreases.

Negotiated rates vs 30-day mortality for MS-DRG 291 in the Dallas area


Negotiated rates vs 30-day mortality for MS-DRG 291 in the Chicago area

Negotiated rates vs 30-day mortality for MS-DRG 291 in the Boston areaNegotiated rates vs 30-day mortality for MS-DRG 291 in the New York area

Negotiated rates vs 30-day mortality for MS-DRG 291 in the Minneapolis area

Negotiated rates vs 30-day mortality for MS-DRG 291 in the state of Indiana

These graphs clearly reveal that value, the intersection of quality and rate, in the health economy is as random as throwing dice in a Las Vegas casino. The most notable difference between healthcare and a Las Vegas casino is that many people like to visit Las Vegas. 

How is it that there is no correlation between quality and rate in the U.S. health economy? Because CMS doesn’t even uniformly enforce quality reporting, much less incentivize quality, and the ACA inaugurated an era of cost-plus insurance, leaving “consumers” trapped in a system they don’t understand and cannot afford.  

As Rand analysts are fond of noting biennially, employer-sponsored insurance pays ~2.5X as much as Medicare.6 Of course, the deleterious impact of employer-sponsored health insurance on costs is well-known, as the Congressional Budget Office detailed in March 1994. For Congress to refuse continually to address something that is the catalyst for healthcare’s continuously increasing cost is tyrannical. 

Today, the health economy is too opaque for the American public to articulate all the grievances they should lodge as their forefathers did in 1776. However, even if modern-day Americans don’t understand healthcare quality to quantify value for money, they are beginning to figure out that healthcare is often unaffordable. 

As I have previously written, Federal action to create a true “market economy” for healthcare through the elimination of the tax deduction for employer-sponsored health insurance seems unlikely, because it would be the health economy’s version of “the shot heard round the world.”7 Whether something is unlikely is different from whether it is necessary, and the health economy desperately needs deeply serious men and women with the courage to challenge the tyranny of the Internal Revenue Code and the ACA that implicate healthcare costs.  

With respect to healthcare policy, the Federal government currently seems to have an abundance of deeply zealous people and a scarcity of deeply serious people. Deeply serious people don’t think that providers are the key problem in “information blocking” or that the acquisition of a 123-bed hospital in Mooresville, NC will alter the competitive balance of the healthcare landscape in the Charlotte-Concord-Gastonia, NC-SC MSA or that chargemaster “prices” are the same as reimbursement “rates” or that cost-plus business models are the remedy for an industry whose costs are too high or that a former energy trader should be the majordomo in health policy. 

As I have also previously written, the U.S. health economy is, ironically, much closer to Britain’s National Health Service than stakeholders realize. Americans will really hate the parts that we don’t yet have, and a bunch of individuals who were fed up with government overreach is how we got to July 4, 1776. Health economy stakeholders who fail to realize that delivering value for money is table stakes should not be surprised when they lose healthcare’s negative-sum game. 

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