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The Health Care Industry: How Did We Get Here?

Healthcare2In 1918 President Wilson created the National War Labor Board.  It was made up of twelve members from business and labor with an objective being to ensure that labor strikes did not endanger the war effort.  The original NWLB was decommissioned in 1919 at the end of the Great War but was re-established in 1942 by President Roosevelt.  In addition to concerns over labor disputes and general strikes, FDR and his wartime cabinet were focused on preventing inflation caused by commodity and labor shortages.  The federal government did this in many ways including directing production and imposing price and wage controls.

Business leaders faced a labor shortage during the war years and with wage controls set, had to find other ways to incent workers to their employ.  In 1943, the NWLB ruled the ‘fringe benefits’ did not count as wages and therefore, were allowed under wartime wage control regulations.  This ruling was followed eleven years later by the Revenue Act of 1954 which excluded from taxation employers’ contributions to accident and health plans benefiting employees and classified them as business expenses put the American health care system on its current path (this from Wikipedia, and the book I just finished “America’s Bitter Pill” by Steven Brill).

As a result of these two policy statements (one a war time labor board decision and the other a provision in the tax code), the American health care system was born with the vast majority of Americans getting access to health insurance through their employer.  Employers subsidize their employees’ private insurance premiums for which the business takes a tax deduction.  Employees receive said insurance subsidy “tax-free;” the premiums paid by employers are not only considered tax-deductible business expenses to the employer but non-wage income to the employee and thus, a non-taxable benefit.

This is how America arrived at a health care system and policy dominated by private insurance companies.  In 1965, Lyndon Johnson signed into law bills that created both the Medicare and Medicaid programs (Medicare for retired Americans and Medicaid for the poor and disabled).  In the 1990s, several laws were passed that benefited women and children as well as provided for the portability of insurance.  And then of course, in 2009, Congress passed and President Obama signed the Affordable Care Act or Obamacare.   Our healthcare system is really a medley of programs, mostly private but for the elderly and the poor, public.

During the drama that has been the GOP’s Obamacare repeal and replace attempts these last few months, I have posted much about the need to fix rather than repeal the existing law.   There were reasons for this position.  Attempts at health care reform date back to Teddy Roosevelt’s day with the truly modern attempts dating to Truman.  Despite President Trump’s declaration earlier this year, everyone knows how difficult health care is to understand and reform and so scrapping the existing law and starting over is a fool’s errand and frankly, a waste of time.


At the height of the repeal effort, I dug out “America’s Bitter Pill, Money, Politics, Back Room Deals, and the Fight to Fix Our Broken Healthcare System,” by Steven Brill.  It was published in early 2015 and I downloaded it sometime in 2016 where it sat quietly among the likely 400 other downloads I had yet to read.  I remembered enough from the Obamacare debates back in 2009 (Sarah Palin’s death panels that would kill Grandma) to know that the Republicans were lying about how the law was passed but also recalled the fall out from the “you can keep your doctor” pledge and the atrocious website roll out to realize that there were details beyond my memory that played into the public consciousness about the law.   And so, while our Republican officials were kicking around changes to a law that would reduce the number of insureds by anywhere from 22 to 30 million (depending on the bill), I decided to read Brill’s history of Obamacare, how it came to be, what it was meant to do, why the roll out was a colossal failure and why healthcare costs are so high.  What follows are the points I think are the most germane and frankly, interesting to this subject.

The Big Bang is a Bad Idea

I want to start with the law’s actual implementation.  While some Americans’ first exposure to the Affordable Care Act was via a 2009 town hall meeting in which citizens were fearful of a government take over of their healthcare (and of course, the aforementioned death panels), most citizens waited to pass judgment until they actually had to buy insurance.   President Obama had promised an e-commerce type experience similar to Kayak and Amazon.  As it turned out, unless was actually powered by someone in a kayak, motoring down the Amazon, the user experience was not even close to buying a plane ticket or “name your gadget” from Amazon.

Fortunately, in October 2014 the Republicans shut the government down for the first several days of the website’s launch.  Senator Cruz filibustered the continuing budget resolution, going so far as to read ‘The Cat and the Hat’ on the Senate Floor, in his effort to defund Obamacare.  He need not have bothered.  The website was so full of holes and bugs, that no one could use it to apply for insurance.   Unfortunately for President Obama, Senator Cruz gave up, the CR was passed, everybody went back to work and the media immediately turned to the disastrous Obamacare roll out.  And boy was it a story.

For the last fifteen years, I have played a variety of roles in IT-based projects.  From business owner or analyst, to subject matter expert, tester or project manager I have worked with a lot of people to implement a lot of stuff.   Some of those people might be reading this post right now!  IT projects are hard.  They often involve and require multiple groups with competing priorities to come together and achieve a common goal; a goal with which not everyone agrees.  Technology does not always “work” as seamlessly as one might predict and often requires a lot of workarounds and testing.  (Let’s be honest, it NEVER works right away.  That is why you test it!) Most of the time, in order to complete a single transaction (let’s say, “buy an insurance policy,”) the user must jump through multiple systems, each hop requiring security and encryption and seamless integration.  The user should never see the hops – all of that occurs behind the scenes.

The most ambitious projects of which I have been part included the launch of a new life insurance agent commission system, peripheral involvement a policy owner’s consumer website and the implementation of an IT service management platform.  NONE of these projects are close to what the Obamacare implementation team attempted to do and they each had, to a varying degree, issues and obstacles to overcome.

As I read the chapters in which Brill described the disorganization, lack of decision-making authority and ultimate ambiguous ownership of the AHA project, I recognized almost every problem as something that I had encountered before, only in a much smaller and less impactful situation.   Multiple functional groups (or government agencies) competed for space and authority.  Ultimate ownership was not identified and communicated to all participants.  There was no ONE program manager who owned the full budget, the entire program plan or had insight into all risks and issues.  Multiple agencies operated as silos, rarely communicating with one another or exposing risks.

Decisions were not made on time and were not communicated throughout the agencies to understand the impact of the delay.  As a result, projects that depended on decisions and upstream deliverables experienced greater delays but to make matters worse, could not revise their timelines because they did not know when decisions would be made or dependencies met.  In some cases, decisions were deliberately delayed for political reasons which may have helped Obama win re-election, but resulted in lost time for developers and testers.

When Obama made the statement (many times), that Americans would be able to keep their insurance policy if they liked it and would be able to keep their doctor, he did so in good faith.  What he did not know – and what his advisors did not tell him (on more than one occasion) – was that as part of the execution of the law, older policies that did not comply with the new law would not be grandfathered.  Additionally, in order to keep premiums and deductibles low at roll out, insurance companies were forced to keep their networks narrow which meant that in many instances, individuals were NOT able to keep their doctor.  Obama’s team DID know that but in discussing it at lower levels, agreed that clarification would “muddle the message.”  This does not excuse the President.  As Harry Truman said, “The buck stops here.”  But it does offer an explanation.

Given all the delays (there are always delays, but they were exacerbated by the decision-making process and 2012 election), the website was not adequately tested; and by ‘not adequately tested, I mean – not tested at all.  There was no end to end testing, no performance or load testing and no functional testing.  To the tech virgin that means that no one sat in front of a computer in a nonproduction environment and clicked on the links from start to finish to purchase an insurance policy.  Additionally, there was never a test to determine how many people could use the website at one time without it crashing.  Right now, project managers all over the world cringe at the thought of turning on a website to millions of users without first verifying that the servers can handle the load,

The first users of on October 1, 2013 “smoke tested” the platform.   Not only did it not have the capacity needed to handle the number of users, but it would kick people out, fail to save data, hang and suggest that the user call a phone number that was not staffed.  Worse, the project teams (there were multiple), had no insight into the problems.  They had a command center – but no dashboards, no lights – nothing that told them where the problems were and what needed to be fixed.

Tiger and SWAT teams were dispatched and ultimately the website was not only fixed but resources added to handle more than the expected traffic.  But the damage was done.  State websites like Kentucky did a remarkable job in implementing their state level site – they did such a good job that Kentuckians elected a governor in 2014 who pledged to get rid of Obamacare in his state.  Thing is, more than one-third of his citizens are on some form of Obamacare coverage including Medicaid; they just do not know it’s Obamacare.  How about that?  Kentuckians voted to repeal Obamacare, not realizing that their health insurance, health insurance that they did not have before the AHA, is Obamacare.  So much for a marketing budget.

Before the first person says, “that’s government work for you,” – No.  This is not “government work for you.”  Yes, this roll out was horrible.  Everything that could go wrong – did – and it could have easily been avoided through proper planning, testing and an incremental roll out strategy.  Any technology project of this magnitude should be launched in small chunks, not as a “big bang.”  But in the myriad of private business projects of which I have been a part, many of them have been imperfect.  Some have been downright failures requiring a SWAT or tiger team to come in and “save the day.”  The common failure point across private and public initiatives is lack of leadership and management.  So in the case of Obamacare, the failure to execute should be laid at the feet of the President and in this case, the lack of governance.  Lessons were learned of course, but the lack of management and oversight will forever haunt the generation that introduced the AHA.

Let’s Clarify A Few Things

Republicans like to say that Obamacare was passed in the dead of night without any Republican votes.  This is technically true.  But a much deeper understanding of the process is necessary because what the Democrats did to pass Obamacare was nothing compared to the attempts to repeal it.

Health care reform discussions started in Congress well before the 2008 presidential election.  In fact, Max Baucus, Ted Kennedy and others in the Democratic Party talked about launching health care reform when they thought the candidate would be Hillary Clinton.  Clinton had policy papers modeled after Romneycare, the 2006 health care reform package implemented in Massachusetts under then governor Romney.  Romneycare was actually modeled after a conservative think tank’s approach to reform, a fact that did not help sway Republicans when Obama and the Democrats were looking for bi-partisan support for the bill.

In the lead up to the 2008 election, Obama had not put health care reform at the top of his priority list.  However, after hearing the stories of working-class families declaring bankruptcy because of medical bills or living in fear of getting sick, then-candidate Obama turned a corner.  At the time, he chastised Clinton for her ‘individual mandate’ idea arguing that the government should not force someone to buy something that they may not be able to afford, but eventually came around on that “leg” of the stool once he understood how critical it was to get young and healthy people into the insurance pool.

The Senate and the House each put together their own bills, in fact – both chambers put together multiple bills.  A good deal of work went into getting a bill out of the Senate and the House in 2009 and it is correct to say that the votes were not bi-partisan.  From the beginning, only a few Republican Senators were interested in a bi-partisan effort.  Chuck Grassley of Iowa was one.  However, during the 2009 August recess, the Republicans were taken to task at a few (not many) town halls and as a result, those few Republicans that had been cooperating stepped back from any visible compromise.  But here is the thing:  the GOP continued to offer amendments.  They continued to debate.  They just voted against the amendments that they offered.

The Senate had a filibuster-proof majority of 60 until Senator Ted Kennedy passed away from brain cancer in August 2009.  Massachusetts Governor, Deval Patrick appointed his successor until a special election was held in early January 2010 at which time, the Democrats lost their filibuster-proof majority.   The Democrats now had a Senate and a House bill that differed in key ways.  The next step should have been to send the two bills to a conference committee staffed by members of both chambers and parties to hammer out the differences to deliver a bill that both houses could then pass.  But the Senate would now never get past a filibuster.  So – and this is important – Democratic leadership decided to skip the conference committee and have the House pass the Senate version of the bill.  The Senate and House then had to pass a supplementary bill that could get through the budget reconciliation process.

Are you lost yet?  Well, I was.  The reality was that the Republicans would never have voted for the AHA; they had made that clear coming out of the August recess in 2010.  There will be debates around whether the Democrats asked for input.  Republicans will say ‘no,’ and Democrats will say ‘yes.’  Based on the facts as this author writes them, Republicans participated until they did not, and then they just obstructed.  Obamacare was absolutely a Democratic initiative.  The problem was (and is), that health care reform is not a priority for the Republican Party.  The GOP was against Medicare and Medicaid in 1965 and ever since has actively campaigned against both.

In the recent Republican repeal and replace initiative, all GOP versions reversed not only the Medicaid expansion but changed the calculation by which Medicaid is calculated and then block granted monies back to the states thereby capping federal funding.   Paul Ryan’s “A Better Way” platform which was crafted ahead of the 2016 election cycle calls for the privatization of Medicare, thereby removing the federal government’s role in securing the health of seniors.  Given the free market’s success thus far in the health care industry, allowing it to introduce a profit motive to seniors health care is concerning for so many reasons.

Why Does it Cost So Much?

Well, that is the million-dollar question.   This book provides a lot of insight into that questions and I hope you read it especially if you are walking around cursing one party or the other including President Obama.  The Affordable Care Act’s intent was to increase coverage and guarantee access for millions of Americans.  I thought that it was also intended to reduce the percentage of the federal budget on entitlements, but that was not mentioned in this book.  But the critical factor here is that the ACA was a reform plan placed on top of an existing commodity and set of services and did nothing to address the underlying costs of the product.

We all know that health care costs have skyrocketed over the last few decades, in fact, it is the only industry that has become more expensive with the advent of technology.  I was surprised to learn that doctors, nurses and insurance companies benefit the least from health care cost increases.  For profit (and non-profit) hospitals, medical device companies, trial lawyers, and pharmaceutical companies are the key parties in the equation pushing costs upward.  Politicians on the right focus on market-based solutions but the market has failed miserably in the health care arena.   In the United States, health care is priced and delivered by service so there is every incentive for doctors to order multiple tests and exams.  Brill gives multiple examples of hospital bills in which patients are charged ridiculous amounts of money for services ordered (gauze and aspirin priced at 400% over what it can be purchased for on Amazon).

We have long since believed that the United States has the best health care system in the world and while that may have been true at one time, it is no longer the case.  Several studies conducted in the last few years rank the United States towards the bottom as compared to other industrialized nations.  We pay more for worse results (lower life expectancy) and have for many years.  America’s fascination and almost reverence with “market-based solutions” to every problem we encounter have failed when applying the rules of capitalism to the health care industry.  “Competition” only works when the consumer has the luxury of time and the necessary information to shop around for the best price.  The next time you have chest pains, a cancer diagnosis or are bleeding from an open wound be sure to ask your doctor for an estimate of services rendered before you sign on the dotted line.  It simply does not work that way.

There is no silver bullet to reducing the cost of health care in America.  One bi-partisan idea is to lower barriers to insurance companies to sell across state lines, despite evidence that this does nothing to lower premiums or provide consumers with more choice.   There are some states that already participate in such a program and have found it difficult to recruit additional insurance companies because of the expense in setting up networks of doctors, pharmacies, and hospitals.  So to make the reduction in state line barriers truly beneficial, governments will need to provide additional incentives and that looks a lot like picking winners and losers.

The pharmaceutical lobby has incredible power in state and federal government.  The well-worn rationale for blocking any attempts to negotiate drug prices is that additional regulation will stifle research and development of new drugs and treatment.  I call bullshit on this claim.  Several large and well-known drug companies manufacture product overseas, producing medication that you likely recognize.  A quick Google search identified a 2010 study out of the US National Library of Medicine that found research and development in the United States were not greater than that found in countries that regulated pharmaceutical drug prices.   I found this study in less than 20 seconds.  Imagine what I could find in ten minutes.

Why does this matter?  Because while Medicare and Medicaid negotiate prices with every other supplier in the health care system, the government is barred by law from negotiating prescription drug costs in any public health care problem.  I will hand it to the drug lobby – it did a stellar job of demanding (and winning) this provision in the Medicare Part D expansion during the George W. Bush Administration.  Steven Brill touches on this in his book but the result is that this provision, combined with the incredibly inefficient process by which drugs are priced and brought to market has resulted in prescription drugs being the most costly portion of health care in America.


In addition to what most consider valid “inputs” to the cost of health care service production, is what I like to call “overhead;” that is, marketing, public relations, administrator fees and lobbying costs.   Think about the amount of money spent on drug commercials each day.  Pick your favorite network and DVR three to four hours of television.  Count the number of commercials and then look up the average ad price and you will quickly get a sense for how much per pill you pay in basic advertising costs and that is before magazine and internet advertisements.  To that add the seven figure salaries of hospital and pharmaceutical executives and six figure pharmaceutical and medical device reps.  Finally, the lobbyists and political contributions.   And even then, drug companies might add on another percentage “just because.”  Honestly – anything is possible because there is no regulation and nothing to stop them.  Remember, they have a patented product and typically something with limited competition.  In many cases, a patient HAS to have a certain drug because of pre-existing conditions or the illness itself.  Again, the laws of supply and demand (aka – the free market) do not work in health care.

All of this “overhead” comes with the existing health care system and thus, changes to it could have far reaching implications to personal incomes and the status quo.  But I do think it is important to recognize what is truly involved.  Pharmaceutical executives and lobbyists have for years pushed back against regulations and price controls asserting that such limitations would stifle research and development.  Why do our leaders not call out the data?  Is it not possible to cap profits at a certain percentage?  Because from everything I have read, there is absolutely no rationale other than suppliers licking their index finger and sticking it in the air to determine which way the wind is blowing to determine prices.  And costs vary depending on what the insurance company will reimburse which means that those without insurance get the short straw coming and going.

Obamacare repeal and replace is dead so now what?

I am a liberal but a believer in capitalism.  In most cases, a free market (or a market with minimal regulation) can address and solve a business problem.  But health care is not a business problem – it is a social and public good.  Most of us on the left believe that in 2017, industrialized nations are obliged to guarantee its citizenry access to health care.   We made great strides towards this goal with Obamacare but obviously, we have a long way to go.

Conservatives, on the other hand, disagree.  Conservatives see health care as a commodity and believe that its services, like any other service (hair cuts, manicures, pedicures, lawn services) should be priced on the open market.  True conservatives honestly believe that health care should be available to those who can afford it; if you cannot afford it, then it is not available.  Certainly, those in office that hold these convictions use other words like “choice” but their positions are based on a very black and white view of markets and government.

I do not know what the solution is for America’s health care cost crisis, but a crisis it is.  Brill offers a few suggestions – reforms that could happen within the industry without a lot of intervention from government.  Those reforms would be a good start, but additional incremental changes will require government engagement and bi-partisan cooperation.  America’s population is aging and as I have mentioned time and time again, as our parents age out of the work force, we are not replacing at the same rate.   Without significant reforms and price controls (yes, price controls), we will simply not be able to maintain the current cost trajectory.  As the middle class points to salary stagnation, I suspect that their employers HAVE given employees a raise; it has just gone to increasing health care insurance premiums.

This problem must be solved and it is going to require that we infringe on some of our beloved “free market philosophies.”  That means that when the conservative media and Republicans scream “socialism” and government overreach (as they did with Obama), the Republican base has to say STOP.  A healthy work force is table stakes in a first world economy and it has to be a guarantee for everyone, regardless of station.

-Amy September 2017

Interesting links
LA Times
Employee Benefit Research Institute – Health Care

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