Katz: Containing health care costs is a systems issue

Reforming the US health care system to make it work for all Americans requires a social and political movement.  Those who today gain the most from the system – the insurance companies, pharmaceutical companies, and health care provider organizations and the conglomerates that own them, private equity firms and Wall Street investors – will not give up their profits willingly.

But research into how the system works and for whom can sometimes provide grist for such a movement.  One seminal paper, famous in the health services research and health policy worlds, was titled “It’s the Prices, Stupid” by Gerald Anderson and others.   Published in 2003 in the journal Health Affairs, its blunt message was that the reason we spend so much money on health care in this country – and so much more than any other western industrialized country – is the high prices we pay for nearly every service. That was a stunning conclusion, because the prevailing notion was – and still is – that health care costs so much in the US because “consumers” use too many services. 

It’s what I used to call, in my various talks on the subject, the myth that people made recreational visits to the doctor’s office and hospital and need to “have skin in the game” so they stop doing that.  Oh what fun, another visit to the urgent care clinic!  An absurd notion for anyone who has had to take time off from work, struggled to find child care, had an urgent medical problem, or just spent their precious time in a medical waiting room.

But it’s that myth that has led to the dizzying array of copayments, co-insurance, and deductibles we all now face.  Remember when insurance plans first levied $50, $100, or $200 copayments on visits to the emergency department if one was not subsequently admitted to the hospital?  The theory was that it would deter “unnecessary” ED visits … unnecessary from whose point of view?  If a 73 year old male (that’s me) has chest pain, goes to the ED, and is then diagnosed with reflux, should that person be forced to pay up?  At the time he’s experiencing what could be a heart attack, will that copayment be a deterrent?  Or just another way get money out of his pocket?

As one ED director I interviewed years ago said, it’s only on discharge that we can know if an ED visit could have been avoided, not on admission. 

The myth that health care spending is so high because we have too much unnecessary care has a corollary in provider payment.  In “the old days,” care providers and hospitals were paid a fee for each service they provided (in the old-old days the fee might have been a chicken or car repair).  Beginning in the early 1980s, this “fee-for-service” system began to be vilified for its apparently perverse incentive: clinicians, clinics, and hospitals would increase the number of services provided to each patient as a means to increase income.  Another source of “unnecessary care.”

So, insurance companies, businesses, and public policy-makers started pushing other payment methods that put care providers at financial risk.  An early scheme was “capitation,” a fixed monthly fee for each patient in a provider’s panel regardless of the number of services provided.  That, the theory goes, would give providers an incentive to keep their patients healthy … thus (again) reducing use rates.

As the years went on, payers and researchers devised other payment schemes: P-for-P or “pay for performance,” DRGs or “diagnostic related groups,” and now VBP or “value-based payment.”  Each purported to use economic incentives to induce better, more efficient care. 

Seems logical, doesn’t it?  But using financial incentives to shape patient and provider behavior is based on bad theory – that patients largely act as economic machines when deciding whether to seek health care and from whom, and clinicians have an economic calculus top of mind when deciding what care to provide or order.  Neither is true.

And so, as each new provider payment scheme dispersed through the health care system and as patients bore ever higher out-of-pocket costs, the amount we spent on health care spiraled ever-higher.  When I started my career in health policy more than 40 years ago, the US spent less than 10% of its gross domestic product (GDP) on health care.  Today, we’re nearing 20% of GDP, despite the advent of all those financial incentives and the economic theories they’re based on.

Now, 23 years after “It’s the Prices, Stupid” comes a follow-up challenge to the orthodoxy of economic incentives as the panacea to rising costs. 

In “Value-Based Payment and Managed Care Will Not Solve the Affordability Crisis” (Health Affairs, January 23, 2026), authors Andrew Ryan, Hayden Rooke-Ley, and Robert Berenson argue that VBP schemes simply don’t address the core drivers of high health care spending: high prices, unmitigated technology diffusion, and high administrative costs.  Rather, VBP initiatives such as the Medicare Shared Savings Program – the largest such scheme – may have actually increased spending due to efforts to “game” the system by selecting patients and practices that would generate more income. 

The article goes on to discredit the underlying economic theory behind VBP, that fee-for-service payment offers physicians the wrong incentives for prevention and efficiency.  In fact:

• Wellness and prevention are mostly the result of non-medical factors outside the influence of clinicians.
• The frequency of patients moving from one medical practice to another (often the intended result of health plan competition) means clinicians who invest in prevention often don’t reap the financial benefits.
• Physicians, especially in primary care, “are motivated by much more than pecuniary incentives”; that is, they are motivated largely by professionalism and dedication to the well-being of their patients.

Finally, the authors argue, VBP “misapprehends the key drivers of US health care costs.”  Such schemes work to restrict the use of health services such as hospitalizations and specialty care, but decades of evidence shows that patients in the US use fewer services – fewer physician visits, fewer hospitalizations, shorter hospital stays – than peer countries that spend much less on health care.

It’s the prices, stupid!

Containing health care spending is a systems issue; it can’t be “outsourced” to private interests whose incentives are, in fact, to increase spending … and therefore their profits.  Rather, Ryan, et al., argue government needs to “commit, for the first time, to sound pricing and coverage policy –  and … do so through publicly and democratically accountable means.”

And I would add, to move toward an efficient, effective, and affordable health care system, government needs to move toward universal coverage and public control over the system’s purse strings.

Aaron Katz retired as a Lecturer at the UW School of Public Health. He was hosting conferences and writing about health policy in the 1980’s through his retirement from UW in 2019.