Affordable, Quality Healthcare for Every New Yorker in the 21st Century
The State of the State in Health Insurance
The Federal Government’s failure to provide a comprehensive healthcare system for the United States has led to a convoluted, public/private hybrid that is far more expensive and far less effective than it should be. The cost of drugs, doctors, hospitals, and healthcare administration are all far higher in America than in other countries, and key health indicators, like lifespan and infant mortality, are bad and in many places deteriorating. New York State is no exception to these unwelcome national outcomes.
Nearly half of all New Yorkers, 49%, receive health insurance through their private or public employer. Roughly 25% of the state population is on Medicaid, 12% is on Medicare, and 1% rely on other forms of public insurance. Another 6% get coverage directly from an insurance company without being part of a group.
Since the Affordable Care Act (Obamacare) went into effect in 2013, coverage in New York State has improved markedly, with an additional 1.5 million people gaining health insurance. More than 95% of New Yorkers are now covered.
The New York Health Act, passed by the New York State Assembly twice but not by the State Senate, proposes a statewide single-payer system to replace the current structure. It would eliminate private insurance altogether in favor of a Medicare-like government program that would cover all New Yorkers. If New York were starting fresh, that might be a sensible way forward. But we are not. Millions of New Yorkers rely on employer sponsored, private insurer health plans and do not want to be forced off of them. Improving the quality and accessibility of health care in New York must take that reality into account. Decision makers must also recognize that hundreds of thousands of New Yorkers’ jobs and livelihoods are linked to the existing structure. Change must take place at a pace the public will support.
For the vast majority of New Yorkers, the key healthcare issue is cost. Medical expenses are unreasonably high and rising too fast; lists of charges are often secret, resulting in huge surprise bills; invoices are impossible for the average person to understand; and wildly unfair outcomes occur as a matter of course. Prescription drug costs alone can bust a family budget.
New York State can address the fundamental challenge of healthcare costs without the disruption of a single payer plan by adopting two important policies:
- Establish a rational pricing system overseen by a state authority to ensure every patient pays the same amount for the same service
- Create a New York State owned and operated pharmaceutical company for generic drugs
The Empire State Rational Health Payment System
New York should create the Empire State Rational Health Payment System. The premise is simple. The amount an insurance company reimburses a hospital for a defined procedure, or that a patient pays, is the same for everyone across all hospitals. A state agency sets the amount and it applies to all insurance companies and all patients. It is the type of system Maryland adopted long ago and that was recently adopted in Washington State.
In New York today, each hospital creates its own charge master, a price list for each medical procedure or patient service. These lists are generally confidential. Patients and other interested parties are denied access to them. They vary dramatically across hospitals in amount and structure, so comparing hospital costs is difficult.
The actual amount charged for a procedure depends on the agreement the hospital has negotiated with the specific patient’s insurer. The payments can differ by as much as five or ten times for the same procedure performed by the same medical team inside a single hospital on the same day.
The companies with the largest number of insureds have the greatest bargaining power. With cruel irony, uninsured and underinsured individuals often end up being charged the highest price, while someone with a good job and good benefits at a large company is likely covered by an insurer who pays a far lower amount. The diabolically unfair logic of the system is part of the reason medical expenses are the single largest cause of bankruptcy filings in the United States, which is unconscionable.
The rational system proposed would create pricing transparency and fairness. It would also allow the state to exert influence on medical costs to prevent them from rising faster than wages and people’s ability to pay them. An annual statewide cap on price increases allowed across the system can prevent unsustainable rises in medical costs while allowing necessary adjustments and pricing flexibility for new innovations without limiting increases caused by growth in healthcare use.
New York State should phase in the rational payment system starting with private insurance plans for hospital procedures. Over time, the program can be expanded to merge the reimbursement rates for public and private insurance plans, and similar structures can be set-up for doctors and pharmacies.
The Empire State Affordable Prescription Drug Company
The State of New York should create The Empire State Affordable Prescription Drug Company, a public corporation tasked with manufacturing generic versions of commonly used prescription drugs.
When a market for an essential service fails, the government has an obligation to act. Our market based system of pharmaceutical research and drug manufacturing works well in some ways and poorly in others. Patent laws give pharmaceutical companies the exclusive right to produce and to sell new drugs they create for a period of time. The monopoly power granted allows the company that absorbed the expensive research and development costs to recoup its investment with a profit by charging a high price for a drug no one else is allowed to produce. The system is designed to provide corporations with the incentive to undertake ongoing research into new products that respond to medical needs. So far, so good.
When a patent lapses, other manufacturers are allowed to produce and sell the drug. This should result in a dramatic lowering of costs, perhaps by 80% to 90%, since the materials needed to produce most drugs are a very modest part of the price compared to the costs of initial development.
There are at least two reasons the system is not working as well as it should.
One is that pharmaceutical companies often seek unfair advantage from the patent system. As a drug in demand approaches the patent expiration date, a modest change in the formula can trigger a new patent. That, in conjunction with strong branding power and close relationships with hospitals and doctors, can allow a company to continue to charge a high price for a drug that has no more benefit than a lower cost generic drug. This is why insulin, for example, a life-saving drug for diabetics, costs roughly ten times more in the United States than it does in Canada.
A second reason is that the profit margins on generic drugs are much lower than the margins on patented ones. Pharmaceutical companies, motivated by profit, choose to allocate almost all their resources towards patent medicines. As a consequence, generic drugs are not manufactured as broadly and are sometimes not as available as they should be. A University of Chicago study reports that 40% of generic drugs are manufactured by just one company. Only a handful of manufacturers produce many of the generic drugs needed in New York. This situation has already caused periodic shortages, and paradoxically, may create monopoly pricing power for the generic drug industry over time.
A state-run New York drug manufacturer can fill the gap the market has created around generic drugs and inject competition into corners of the market where it is lacking. The state company might also be empowered to manufacture patented drugs in the event of a critical shortage. After a start-up period, the company should be financially self-sufficient providing a public service without ongoing cost to tax payers.
Strictly enforced patent laws have provided pharmaceutical companies with incentives to invest billions of dollars in research and development that have led to innovative breakthroughs and cures for many different illnesses. But the current system has also brought us $600 Epi-Pens and unconscionable insulin prices. By preserving the private market incentives that inspire innovation and injecting new competition into the generic market, we can continue to have statewide access to the best drugs at more affordable prices.
Conclusion
Almost ninety-five percent of New Yorkers have healthcare coverage, yet the system is badly flawed and needs reform. The current legislative proposal for a single-payer system would disrupt the millions of relationships that are now in place and working. There is a smarter approach.
New York State should adopt a rational health insurance payment system, and open a public generic drug manufacturer. Each measure would cause a major incremental improvement in the health system. Together, they promise substantial improvement in the affordability of high quality healthcare for New Yorkers. The profit motive that provides helpful incentives for some aspects of our health system would be maintained, and complemented by the state’s commitment to putting the public interest ahead of other considerations for areas where market solutions have failed.
The Affordable Care Act that Congress passed and that President Barack Obama signed into law significantly reduced the number of uninsured in New York, and it has slowed the growth rate of health care costs. But our healthcare system remains badly flawed. With Washington divided and little hope it will do the things required to fix healthcare at the national level, New York State cannot wait for change.
Sources
Robin A. Cohen et al. “Health Insurance Coverage: Early Release of Estimates from the National Health Interview Survey, 2018,” National Center for Health Statistics. May 2019.
Dan Gorenstein, “Why Pharma Companies Are Bowing Out of Generics,” Marketplace. August 2, 2017.
Judy Lin, Jennifer Aguilera. “Gov. Gavin Newsome to propose that California manufacture its own generic drugs. CalMatters. January 9, 2020.
John C. Liu, Chapin White, Sarah A. Nowak, Asa Wilks, Jamie Ryan, Christine Ebner. An Assessment of the New York Health Act: A Single Payer Option for New York State. Rand Corporation, 2018.
New York State. Making Progress Happen: Fiscal Year 2021 Executive Budget Summary. January 2020.
New York State Department of Health Press Release, May 15, 2019, “Bucking National Trends, New York’s Uninsured Rate Continues to Decline, Reaching a Historic Low of 4.7 Percent.”
Uwe Reinhart, Priced Out: The Economic and Ethical Costs of American Healthcare. Princeton University Press: Princeton and Oxford. 2019.
