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“There’s no real story here for why we should think that giving the government control of the health care economy would lead to a cost reduction. Cost reductions benefit consumers who are very widely distributed and disorganized, whereas the producers of health care are very concentrated, powerful industries that are able to exert much more focused pressure on government to spend money.”

Sounds like Milton Friedman, but those were actually the words of Charles Silver, a law professor at the University of Texas at Austin and author of the new book “Overcharged: Why Americans Pay Too Much for Healthcare.” Silver thinks health care costs in the U.S. are unrelentingly high primarily because Americans rely too much on third-party payers, which masks how much health care is really costing, particularly in terms of government spending and taxes.

With that in mind, Silver is opposed to expanding Medicare along the lines proposed by Democratic U.S. Sen. Bernie Sanders. Though a Democrat himself, who believes there should always be a “safety net” for the less fortunate, Silver says Medicare in its current form is vulnerable to “moral hazard,” waste, abuse and fraud, and thus faces a dim future if it is not radically restructured into a cash-grant program.

Silver was interviewed earlier this month by Keli‘i Akina, president of the Grassroot Institute of Hawaii, for Akina’s “Hawaii Together” program on the ThinkTech Hawaii, a transcript of which is below. To view the conversation, go here.

Transcript below:

Keli‘i Akina: Aloha and welcome to “Hawaii Together.” I’m Keli‘i Akina, your host. And although I’m a trustee in the Office of Hawaiian Affairs and the president/CEO of the Grassroot Institute, the comments you hear from me today and from my guests are purely our own, and that gives us the license to say anything we want because we’re just representing what we hope will be common sense.

I think one of the things that comes to us in common sense is that we as Americans pay far too much for health care. Surprisingly, we may not always realize that because at the point of sales, sometimes we get things free, it seems, or at very low cost, but when we really add everything up — and keep in mind that there’s no such thing as a free lunch — together we are all paying far more than we really need to pay. And that’s a conclusion that has been reached by many experts across the country, and one, in particular, happens to be a professor of law at the University of Texas at Austin.

He’s a distinguished professor. Indeed, he holds a chair there at that wonderful university and he has written quite a bit on health care costs across the nation. In fact, you may know his recent book, “Overcharged: Why Americans Pay Too Much For Healthcare.” We’re going to dive right in and pick up a conversation that I began with him recently at the Cato Institute summit on health care held in Austin, Texas. My guest today is professor Charles Silver. Charlie, welcome to the program. I wish I could welcome you live to Hawaii right now.

Charles Silver: Good luck. You will have an opportunity to do that. But thank you very much for having me on, Keli‘i.

Keli‘i Akina: That’s right. What’s your temperature in the evening up there in Austin?

Charles Silver: Oh, it’s beautiful. We’re around 60 degrees today, it’s been a delightful day.

Keli‘i Akina: That is very warm there for this time of year. And here in Hawaii — I don’t want to make you too jealous — it’s about 85 on the beach right now.

Charles Silver: 85, my goodness.

Keli‘i Akina: That’s right. It’s a great place to relax, and to heal, and to get well. We have a very healthy state population, for the most part, compared to other places. But to keep us healthy, we pay quite a bit of money. This is something that’s in your expertise, your forté, so to speak. How did you get started studying and commenting on the cost of health care across the country?

Charles Silver: I started many years ago. I have a very large set of studies, empirical studies, using a big data set of medical malpractice litigation, and I worked with several professors on that, including one of whom is a professor of law and medicine at Georgetown University now. He and I branched out and started writing about health care policy more generally, including medical ethics as well as occupation arrangements for health care providers.

Keli‘i Akina: One of the things that we have enjoyed as Americans is fairly good access, for most of us, to medicine and to medical care as we’ve needed it. And then we’ve kind of gotten used to getting quite a bit without really keeping track of the costs or even keeping in mind who’s paying it and so forth. Do you think this is the plan, how it should be, or is this some kind of conspiracy? (Laughs)

Charles Silver: You might say that it’s a plan. If it isn’t a plan, it certainly seemed like one. We’ve now reached the point where the health care system is consuming $10,000 per person, so a family of four on average is spending $30,000 a year on medical treatment, which is an astonishing amount of money when you think about it. That’s like buying a very nice new car every year.

Now, of course, that is not very evenly distributed across the country. There are a lot of people who’ve done very little on health care in any given year, but then there are the people who seem to do nothing but use health care, very expensive, very sick people.

But we’ve gotten ourselves into a situation where the costs are literally unsustainable. We spend so much that every available increase in wages, it seems like, is consumed by the health care system. Instead of take-home pay going up, we wind up shipping more and more dollars to health care providers.

Keli‘i Akina: Now you’re talking about the cost, which makes you sound like an economist when it comes to health care, but there are other values that people often hold in our country when it comes to health care. One of them is the democratization, the availability, the access of health care for everyone. In fact, there’s a gentleman who, unfortunately for him, didn’t become president of the United States, but he has a plan for the United States now. It’s called “Medicare for all.”

I know you’ve taken careful look at this. This is Bernie Sanders’ plan. It sounds so good; let me tell you why. Because if you believe in FDR’s vision, if you believe in LBJ’s Great Society, and in Medicare, and that it’s doing great things for many people, what could be bad with expanding Medicare? “Medicare expansion.” That’s the term that, I think, Sanders uses, and that just sounds like it’s more good for more people and, yet, I don’t think you take that perspective, necessarily. Do you, professor?

Charles Silver: Well, no. But we should be clear about something. I am a Democrat. I’m not a Republican bashing Bernie Sanders. I am really concerned about “Medicare for all,” though, because I think that Medicare has greatly inflated our costs. I fear that if we were to follow Senator Sanders’ recommendation, the cost of the system would become so outrageous that it would just absolutely collapse.

That said, I think that access to health care is very important and I believe that we will always have to have a safety net. But I also believe that the only way to bring health care spending under control and also, frankly, to improve the quality of the health care that we receive — because people need to understand that a good deal of the health care that they receive at present is both mediocre and even dangerous — the only way to restore sanity to the health care system is for people to start paying for more of their medical treatments in the same way they pay for everything else, which is to say directly.

When people pay their mortgages, they don’t use insurance to pay for it, they don’t use Medicare to pay for it. They pay for it themselves. The same thing goes for cars and groceries and pretty much everything else you can think of.
Markets serve us very well in most of those areas. We don’t have an automobile cost crisis. We don’t have a cost crisis in almost any other area that you can think of. That’s for a straightforward reason. When people pay for things themselves, they demand good value for their dollar. When we start doing that in health care, we’ll get costs under control.

Keli‘i Akina: You know, what I hear you saying, Professor Silver, is that we treat medical cost in a fashion different than we treat virtually everything else that we consume. And as a result, we have a system that is very disconnected from the reality in terms of the economics and it has consequently become very inefficient, and perhaps, as you and I can discuss later on, it has become fraudulent. But in lieu of having Bernie Sanders here, who was not able to make it …

(Laughter)

… I wanted to read something that you passed to me as a quote from him because I want us to make sure that our facts are correct, that this is really what Sanders and many in the Party are promoting in terms of Medicare expansion.

Sanders says this, or his actual plan on his website says this: “Bernie’s plan will cover the entire continuum of health care, from inpatient to outpatient care; preventative to emergency care; primary care to specialty care including long-term and palliative care; vision, hearing and oral health care; mental health, substance abuse, as well as prescription medicines, medical equipment, supplies, diagnostics.”

I’m going to stop it there, but jump to another quote and then let you respond: “As a patient, all you need to do is go to the doctor and show your insurance card. Bernie’s plan means no more co-pays, no more deductibles, and no more fighting with insurance companies when they fail to pay for charges.” Then, in a big banner, he says that it will save trillions of dollars. Now, that really sounds good, it does.

Charles Silver: It sounds wonderful. I wish it had any hope of being true.

Keli‘i Akina: And shouldn’t you as a Democrat be blowing this horn? But anyway, what are your thoughts about this? Is this correct, what I’ve read? Is this actually what the plan would result in?

Charles Silver: It’s hard to know where to begin. There are estimates as to the cost of Senator Sanders’ plan. But the first thing to understand is when everything is free, it’s greatly overconsumed. In fact, P.J. O’Rourke had a wonderful line, he said, “If you think health care is expensive now, wait until it’s free.”

Keli‘i Akina: (Laughs)

Charles Silver: That’s the fundamental problem, is that we have empirical studies on the impact of insurance on health care consumption, and they all show that the more insurance people have for health care costs, the more medical treatments they use. So Senator Sanders’ plan is a recipe for increasing the amount of health care that people consume. That is already one of the biggest problems that we have. People over consume health care. We rely far too much on medical treatment to affect our health, and far too little on other things that turn out to be much less expensive then also offer much greater bang for the buck. So Senator Sanders’ plan would encourage people to continue to overuse and even increase overuse instead of getting people to do other things that would be better for them and cheaper for them.

Keli‘i Akina: Now we’re not trying to pick on Senator Sanders here but we are focusing on Medicare. And someone may wonder, why focus on Medicare when talking about costs to Americans? As you point out, Medicare is actually pivotal in terms of setting the price points that go well beyond the Medicare system. And that’s why we really have to bring about reform there, if we want to see better economics in the system.

Charles Silver: Medicare is hugely important for a variety of reasons. One reason is it’s just gigantic. It’s over 600 billion dollars. So by itself, it’s an 800-pound gorilla. But another thing is that private insurers have historically followed Medicare’s lead. In fact, there are studies that show that when Medicare increases the payment for a service by a dollar, private insurers increase their payments by a $1.35. So Medicare, you might say, is the price setter for the entire market. So as long as Medicare keeps spending more and more money, which historically it has done, private insurers are going to spend more, too.

Really one of the deep problems with Senator Sanders’ idea, of giving the federal government control over the entire health care economy,, is that there is no precedent for the federal government ever saving money on health care.
We have had Medicare and Medicaid since the mid-1960s. We have a very long track record — I don’t know, 50 years — of Medicare or Medicaid spending to look at, and what that track record shows is that every time the government weighs into this swamp, it just spends more, and more, and more money. It’s really hard to imagine how much growth has occurred in health care spending, but we started out in the 1960s spending something like $27 billion a year, and we’re now up to $3.4 trillion.

The average growth rate has been, I think, over 9 percent a year since the 1960s. The vast majority of that is driven by a combination of things like third-party payments, which would be Medicare and Medicaid and private insurance, and tax breaks that encourage people to spend money on medical treatments instead of on other things.
Unless we go back to direct payment and treat health care like everything else, this cost crisis really will end very quickly.

Keli‘i Akina: In fact, you’ve shown and charted that every government intervention in the health care system has resulted in not only higher prices within Medicare but has resulted in higher prices across the American health care system. And so in many ways, government intervention, at the heart of this, is really what drives the costs up.

Now we’ve got a couple, just a minute before we go to a break, but what, quickly, would be some of those factors that are responsible for the government’s role being one that pushes prices up.

Charles Silver: The government responds to interest group pressure. So there’s a straightforward cycle: The government sends money to the health care providers. The health care providers, they use some of that money to flow back to the government, in the form of payments through lobbyists, and in the form of political contributions. They’re constantly exerting pressure on our senators and Congresspersons to give more money to the health care sector, and, of course, the government is happy to oblige.

Every so often, the government does cut back on things, but even when it cuts back, it usually adds some kind of a spending increase to offset whatever reduction it’s seeming to impose.

Keli‘i Akina: Very good.

Charles Silver: So the big problem is there’s no real story here for why we should think that giving the government control of the health care economy would lead to a cost reduction. Cost reductions benefit consumers who are very widely distributed and disorganized, whereas the producers of health care are very concentrated, powerful industries that are able to exert much more focused pressure on government to spend money.

Keli‘i Akina: Very good. When we come back from our break, what I’d like to ask you about is the role of fraud, waste and abuse in driving up our costs in the Medicare system, and then we’ll finish off on your prescription for the American health care system. How does that sound?

Charles Silver: Very good.

Keli‘i Akina: Very good. My guest today is Professor Charles Silver of the University of Texas at Austin Law School. We’re talking about why Americans pay too much for health care. We’ll be right back on the ThinkTech Hawaii broadcast network. Don’t go away.

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Intermission
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Keli‘i Akina: I’m back with Charles Silver, professor of law at the University of Texas in Austin. He’s a specialist in one of our national experts on the rising cost of medical care for the American people, why we pay too much. As we’ve been talking, we’ve been looking at some of the reasons that Medicare, which really drives the price structure of health care cost for everyone in the country, is really getting out of control.

One of those reasons, in particular, has to do with efficiency, and beyond efficiency, the presence of fraud, waste and abuse. Professor Silver, do we have a system that has a good deal of fraud and waste and abuse in Medicare?

Charles Silver: Absolutely. The unfortunate truth is that about one out of ever $3 that passes through the health care system is wasted. Total spending is about $3.4 trillion. So we are annually wasting more than $1 trillion. A large fraction of that money, exactly how much we can’t say, but hundreds of billions of dollars each year, goes into the pockets of criminals. These are the people who send in phony bills to the government, which the government then pays, and the criminals take the money and do what they will with it, with no hope (of the government ever) getting any of it back.

Keli‘i Akina: In all fairness, we need to let the government speak for itself and defend itself. According to official report, there is only a measly 10 percent …

Charles Silver: (Laughs)

Keli‘i Akina: … fraud taking place. What are your thought about that?

Charles Silver: “Measely” is in the eye of the beholder. The Medicare budget is about $600 billion and the Medicaid budget is over $500 billion. So 10 percent of $1.1 trillion is a measly $110 billion. That’s a lot of money, even on a low-end estimates. And the government gets almost none of that back. The federal government recovers about $3 (billion) to $4 billion dollars a year.

So the net out of pocket — which I should say is our net out of pocket, right? because this is all taxpayer money — is in excess of $100 billion even using the government’s low-end estimates.

Experts in the field put the estimate much higher; they put the estimate at somewhere around one-third of all of Medicare’s budget. Boy, at one third, now you’re talking several hundred billion dollars a year from Medicare and Medicaid combined. Again, a tiny fraction of which is ever recovered.

Keli‘i Akina: There are so many opportunities for fraud in the system because there are so many moving parts. We could spend episode after episode talking about that, and that’s one of the things you do talk about in your book, “Overcharged: Why Americans Pay Too Much For Healthcare.” But I want to switch for a moment to some of the social and psychological issues that really allow this system of health care to be fraudulent and to be inefficient. And one of them has to do with the fact that, with Medicare and Medicaid, we create a point of sale. That is the point at which the consumer actually receives the service or the good, which has an unrealistic low price attached to it. And what does that tell you in terms of what human nature will do with that low price attached to medical health care resources?

Charles Silver: The main price at the point of sale really is low. The average person who’s hospitalized might pay as little as 3 percent of the hospital bill at the point where the services are delivered. So the cost, the total cost, is just greatly in excess of what the individual bears. This creates a simple moral hazard problem, where people are willing to use medical treatments the value of which does not actually exceed the cost, but it does exceed the small fraction of it that the consumer pays at the point of sale.

That’s corrosive of our judgment. That causes us to think about health care in the wrong way. We don’t ask of health care the same questions that we ask when we buy cars, when we buy food, when we buy anything else. Namely, is the total thing that we’re receiving worth the total cost that it incurs? So it’s corrosive of our judgment.

It also creates an environment in which fraud can flourish because what happens is that providers of all types basically bribe patients. If you’re only paying three cents on the dollar for health care and the provider is making a big profit off the rest of the dollar, the provider can say to you, “Look, I’ll give you five cents, so that covers your three cents and gives you two cents more to take this medical treatment.” Then the provider makes the remaining 95 cents, so this is very profitable. This practice actually happens all the time. For example, the drug companies today give people coupons. If you have insurance, they’ll give you a coupon that will cover your co-pay for the drug. You don’t pay anything out of pocket, they get to keep the 95 cents, or whatever it is after the coupon is used, and they make out like bandits. And they’re far from the only ones who used this strategy.

Keli‘i Akina: In the beginning when Medicare first was proffered, the medical establishment was opposed to it. Doctors and hospitals didn’t want to see anything of the kind, but today, they are amongst the biggest fans of Medicare. And I think this speaks to what you’re talking about. There’re being so many moving pieces. There are opportunities at every level, particularly at the provider level, to be able to take advantage of what we might call incentives within the system.

Charles Silver: The studies of this are very clear that right after Medicare and Medicaid came online in the 1960s, providers figured out that they can raise their prices without any consequences because the government was footing the bills. So in the years succeeding of Medicaid’s inception, hospitals raised their prices something like 15 percent a year. And physicians raised their prices something like 7 percent a year.

They got no pushback on the prices, so the price increases just kept continuing. That was the beginning of what I would call the end. Now we are in this very straightforward insurance-driven cost spiral, and it will continue until we stop using insurance to pay for health care the way we all know.

Keli‘i Akina: Well, your diagnosis of the American health care system differs greatly from that of your fellow Democrat, Bernie Sanders, and consequently, your prescription for what should be done is not expand Medicare but quite the opposite.

Let me ask you what your solution is and why don’t you give us the pie in the sky first?

We don’t always get what we propose, but if you were the ruler of the universe, if you were the Lord God Almighty Himself who by fiat could change the American health care system, and anything else you wanted to change, what would you do?

Charles Silver: Well, as I said at the beginning, I recognize the need for a safety net, so I wouldn’t simply end a public support for health care costs. But the first thing I would do would be to convert Medicare and Medicaid into cash-grant programs. Instead of giving the money to health care providers, instead of buying services for people, I would give people the money. I would give senior citizens the money, and I would give poor people the money. And I would let them buy the services or the insurance that they think suits their needs best.

What would happen is, immediately, the elderly and poor people would be in the driver’s seat. They would be the ones making their purchasing decisions. And instead of treating the government like their customers, hospitals, doctors and all other health care providers would have to start treating the patients like their customers. They would have to demonstrate to the patients, “Hey, our services are worth what they cost.”

That would exert great pressure on them to do two things: One is to disclose their prices. Today, people don’t even know what health care costs; they often don’t even ask about it because they don’t care. They’re only paying three cents on the dollar, so it doesn’t matter. So the first thing that would happen is that providers would have to be transparent about their costs because patients spending their own money would demand this information.

The second thing that providers would have to do would be to compete on cost. If I’m a doctor and I’m treating a patient for diabetes or some other long-term illness, I would have to tell the patient, “Here’s what I’m charging,” and the patient would be free to stay. “But wait a minute, this other doctor is only charging 75 percent of that. Why are you charging so much?” And if I didn’t meet their cost, that patient would be free to go to another doctor or another clinic for management.

So, if we put the patients in the driver’s seat by giving them the money, we would restore competition to the health care sector almost immediately. And I think in very short order, there will be a revolution among the providers.

Now that’s the pie in the sky that you asked for. Do I think the government it’s going to do that? No, because the providers will never stand for it. They don’t want to be subject to this pressure to compete. They don’t want to be subject to pressure to reduce their prices. So they’ll pull out every stop in order to block it.

Keli‘i Akina: Well, Charlie, we’ll have to have you out in Hawaii. Perhaps there, you can give us some short-term, immediate solutions that we could use in order to push the government in the right direction. But until that day, I want to wish you an aloha and thank you for being with us today.

Charles Silver: Thank you. It will be my pleasure to visit, anytime.

Keli‘i Akina: Very good. My guest today has been Professor Charles Silver of the University of Texas at Austin School of Law, and I hope you’ll get his book, called, “Overcharged: Why Americans Pay Too Much For Healthcare.” Until next time on “Hawaii Together,” I’m Keli‘i Akina on the ThinkTech Hawaii broadcast network. Aloha.