Capitalisn’t: Is Healthcare Making Capitalism Sick?

Episode Transcript

Zack Cooper: I think if you went up to workers and said, "You can have $10,000 more or $5,000 more next year if you choose a plan with a narrow network," some folks would make that choice. This sets the stage for where we could go as a country from a policymaking perspective going forward.

Luigi Zingales: A couple of weeks ago, the Stigler Center, which sponsors this podcast, had a conference on whether capitalists can be popular. There was one answer everybody agreed on, the US health care system is not working.

Bethany McLean: It was really interesting. Health care came up on pretty much every panel. Labor economists agreed that it's a huge friction that prevents people from changing jobs. Others said that the lack of antitrust enforcement has enabled hospitals to raise prices without improving quality, and it contributes to income inequality. In fact, Zack Cooper, who is an associate professor of public health and economics at Yale, has argued that rising health spending in the United States since 1975 can explain roughly the same share of the growth in income inequality as increased trade, outsourcing, or automation.

Luigi Zingales: There are problems with prevention, allocation of resources, oversubscription of drugs and procedures, and overpricing of nearly everything. To sort them out and to suggest some practical achievable steps we might be able to take, we decided to invite an expert in the growing field of health care economics, none other than Zack Cooper. In addition to his role at Yale, he is the director of the 1% Steps for Health Reform, a project that recognizes that high health care spending in the United States is the result of a myriad of small problems that all add up. The project works with leading scholars to identify these discrete problems and offer evidence-based steps to address them.

In 1963, the Nobel Prize winner, Camaro, who had previously proven the working on the invisible hand, argued that the invisible hand does not work in medical care industry. Can you explain to our listeners why?

Zack Cooper: I think he said it could. I think he said there are just a bunch of things in health care that potentially look very different. The first is just a symmetry of information. I default to my doctor to tell me where I should go, what I should need, and that ability to shape demand makes the market look very different. Second is entry and exit. I can't go have Zack's Neurosurgery Clinic next week if that's what I decide to do, and that's for very good reasons. We have a bunch of licensing and credentialing. Closing hospitals is a big deal. Information, we've got entry, exit issues. Quality is very tough to measure. I think my doctor's good, but how do I really know?

Then there are all sorts of externalities. I do better when you and Bethany are getting medical care. Take COVID as an example. In some ways, we underprice some of these services that have positive externalities in the health care sector. It's tricky. It's pretty different than the market for screws or the market for tomatoes.

Bethany McLean: I heard you talk in one place about your own personal evolution and how you thought about health care, that you started, I think, with a much more standard view of how a market should work, and you've changed your mind over time. I'd love for you to chart that evolution for our listeners.

Zack Cooper: I think the big one for me has been my view on price transparency and the idea that consumerism is going to change things. I think economists, for lots of reasons, like looking under the lamp post at demand, and we think that, oh, if you just have higher cost sharing and more consumer skin in the game, people are going to make better choices, and lo and behold, the market will become more efficient.

I was doing a series of papers looking at, of all things, MRI scans. In one of the graphs we have in the papers from Manhattan, there's literally 10x variation in the price of MRI scans in the city. That's a little bizarre. Moreover, we saw really strange patterns. The average patient was driving past six places between their home and where they got care that were less expensive than where they ended up going.

The question is, what's driving this pattern? An economist will say, "Okay, well, maybe it's out-of-pocket costs," folks making some funny choices or folks who are over their deductibles. It turned out not to be that. We tried to figure out if there were quality differences across MRI scanners. We looked at the type of machines being used and whether people were having to get repeat MRI scans. It wasn't that. It wasn't distance.

What was it? It was that patients just listened to where their doctors told them to go. Some of that is just habit. Maybe the doctor plays tennis with the person who's doing the imaging study. Some of it's related to what we'll probably talk about later, which is vertical integration. We've seen this real wave of consolidation in the health care sector over the last 25 years. One of the big trends has been hospitals buying physician practices. We know that when that happens, where physicians send their patients can shift.

That was my big evolution. First, that you can give all of the pricing information you want, it really isn't going to affect folks because they listen to their doctors. Second, I think cost-sharing just doesn't really work. Hitting patients over the head with high out-of-pocket costs basically gets them to stop consuming care, but it doesn't make them consume it more rationally. They don't differentiate between necessary and unnecessary services. You actually see pretty marked degradation in health.

This is where people get pissed at economists. Folks like Luigi and I probably wouldn't have been saying this 10 years ago. Everybody else in the country would have. We've been a little slow to the uptake to say, "It turns out health care [inaudible 00:06:03], it's complicated.

Bethany McLean: One of the things I've thought about from my perhaps superficial journalistic point of view as I think about the health care market is just that it is this really strange mixture of government incentives with private market incentives. I wonder if those can ever work well or if they can work well if they have to be structured differently than they are in health care. Is there an ideal mixture?

Zack Cooper: I want to just take a step back and say, look, there is actually evidence that markets do function in the health care sector. Now, I have a bunch of work that shows that when hospitals are exposed to competition, their death rates go down. Amy Finkelstein and Chad Syverson, who's Luigi's colleague, have really good work showing that good hospitals grow more quickly. If you look at companies in Soviet-block countries, you actually find back in the day, good firms didn't grow, bad firms did. It's because the czars' idiot nephew was running the bad firm and the money went there and the good firms weren't getting more capital.

I think markets can function. They just require a decent amount of scaffolding. I think if I were to start with a system, and this is just me, I think I would start with just one system for everybody. I think this odd division that we have between old and young, rich and poor, self-employed, working for a company, it just doesn't- it doesn't make much sense.

Then you have a choice about, in a sense, whether government should steer or row back to the old Osborne and Gaebler days. I'm comfortable with something like private insurance companies offering plans and competing against one another to offer coverage in one big unified market. There's some debate about that, but I think having differentiation of insurance products so that each of us can choose something different does make some sense. I think a walkthrough TSA is a pretty good advertisement for you probably don't want the government running your hospital. I think we probably do want privately delivered health care.

I think the big question is, do we want market-determined rates? We are the only country that allows hospitals and insurance companies to negotiate their prices. It isn't surprising that a hip replacement in the US is about $37,000; it's about $11,000 in Germany. Hospitals' prices in the US have gone up since 2000, faster than prices in any other sector of the economy. I think we can have competition, we should have hospitals competing, but we do have to put up some structures to make those markets function better than they would without some form of regulation.

Luigi Zingales: You run a center called the 1% Steps for Health Reform. I understand your philosophy is that there is no single culprit for high health care costs. It's a lot of a thousand cuts. If you were to name the three biggest cause for the inflated cost of US health care, as you said, basically here, staff costs three times as much as in other developed countries. Where would you point your finger to?

Zack Cooper: I think if there's one- let's say two fundamental problems with the way we've structured health care system that makes us differentially high spending. The first is employer-sponsored health insurance and the tax exclusion that we get for employer-sponsored care. Taking a step back, it's late 1940s, we're fighting a war, and the country put in wage controls. Part of the reason they put them in is so that people weren't going to high-paying jobs in the US, they were more willing to go off and fight in Europe.

One of the ways that companies got around wage controls was by giving their workers more and more generous benefits. Eventually, they passed a tax exclusion for workplace benefits. It's now the largest exclusion in the US tax code. I think the downstream consequences of that 70 years later are pretty significant. I challenge you, Luigi, and you, Bethany, what are your insurance premiums? Do you have any idea what you're paying a month for health insurance?

Bethany McLean: I do because I work for myself. [laughs]

Zack Cooper: Okay. You're not subject. Luigi, you-- [crosstalk]

Bethany McLean: I understand in glory detail what my health insurance premiums are.

Zack Cooper: Luigi, I'll put some money down saying that you may not.

Luigi Zingales: I have an idea, but I don't know to the last digit.

Zack Cooper: Most people don't. In a sense, they're paying for it, and this is what a lot of my research thinks about it. They're paying for it in the form of foregone wages. That's first. Second, because there's this tax exclusion, we give people more generous health insurance coverage than I think we otherwise would without it. There are all sorts of problems with giving people much more generous health insurance coverage than you otherwise would. Chiefly, it encourages a level of consumption that I think they otherwise wouldn't do and a lack of sensitivity to some of the tough things that you probably would want to do to lower health care spending.

I think that's probably the original problem in the US health care system. It's this employer-sponsored health insurance, this exclusion in the tax code. The second, getting people universal health care, having one system, was a lot easier when health care spending was low. A lot of the countries that got to universal health care did it in the 20s, the 30s, and the 40s before health care spending was what it was today, which is roughly $8,000 to $10,000 per person. Once you have the universal system, you were much more conscious of cost control in a way that we just never became.

Then I think the third is, again, this pricing issue, which is there are trade-offs, but we've allowed a system to become remarkably consolidated in virtually every quarter, and then relied on those firms to negotiate prices. Lo and behold, in markets where there isn't much competition and you have negotiated rates, those rates turn out to be exceptionally high.

Bethany McLean: I want to get to the consolidation, but you said two things that are in a tiny bit of conflict with each other. From a behavioral economics standpoint, I wanted to tear them apart a little bit. One is that, earlier, that it doesn't actually work to make people responsible for their health care spending because they tend to make bad decisions about it. I'm paraphrasing a little bit. The second that you just said is that giving people access to unlimited health care, essentially, overpaying, actually means that they tend to use too much of it.

Is there a happy medium in there? Actually, I'm asking on a personal level too because I have a plan with an extremely high deductible in order to make my premium semi-affordable because I do have this very high deductible. I think I can manage this year without doing that thing. Is there, in general, an ideal level of encouragement to utilize without over-utilizing?

Zack Cooper: I'm so grateful you've made the distinction. What I was talking about before was out-of-pocket costs for the consumer. I think people really struggle there. I think that's distinct from choosing which insurance plan they get. I think if you went up to workers and said, "Look, you can have $10,000 more or $5,000 more next year if you choose a plan with a narrow network that doesn't include everybody," some folks would make that choice.

I think the challenge is we don't really allow people to make those decisions. I wish people had more choice of insurance products they chose. I don't think folks can choose which health care provider on the basis of price. I do think that if we nudge people to have more choice of their insurance plans, that might do some good.

This sets the stage for where we could go as a country from a policymaking perspective going forward. There really are two choices that we face. We're coming up to a fork in the road. Every 20 years or so, we get big health care reform in the US. Most of the ones that we hear about that are successful are really about expanding coverage. Partly that's because governments are just better at solving problems of scarcity with the solutions of, just do more.

Now we're going to face this problem with affordability. That's really tough for democratic institutions because the outcomes that we see aren't Pareto efficient, but we're going to end up taking away from somebody. I think the choices are one or the other.

One is saying, look, we probably have to roll back employer-sponsored health insurance. We've got to dump more people into the exchanges. What we know in these individual markets is people choose skimpier plans. When they have a choice of their insurance, they choose not to get these gold-plated plans that include everybody. They start saying, "Okay, at the margins, I'm willing to shift." I think that's one avenue that we can pursue.

The other is we could start thinking about expanding Medicare in one way, shape, or form. I think the reason you do that isn't the Medicare for all bumper sticker, it's that Medicare has regulated prices. In a sense, expanding the Medicare program in some way, shape, or form gets a bigger share of the public covered under regulated prices.

Luigi Zingales: You seem to speak somewhat fondly of the health insurance business. Let me challenge you with the following.

UnitedHealthcare has close to $450 billion in premiums last year. 70% of these are paid in claims, meaning that the remaining 30% are administrative expenses and profits, which amounts to roughly $135 billion. UnitedHealthcare has a 16% market share. If you assume that their ratio is the same for the industry, that's a bit of a heroic assumption, this is saying that roughly $850 billion are sucked up by administrative costs and profits. $150 billion are 2.8% of US GDP and almost three quarters of the difference between the cost of the health care in the United States and the cost in Germany, which is one of the countries that spend the most.

Don't you think that the first culprit is the health insurance industry that sucks up a lot of profits and spends a lot of administrative expenses and, by the way, does not do anything for preventive health care because there's no incentives to do so?

Zack Cooper: First and foremost, I don't want to be an apologist for the insurance industry. There's a lot that they do that's deeply frustrating, but I do think we have to level set here. It's one thing to talk about the profits insurers make in absolute dollars, and they're enormous. It's a small percentage of the big number. The reason insurers make big profits is because we spend a ton on health care domestically. If you actually look at the profit margin,--

Luigi Zingales: I added to the profit, just to make sure. I added to the profits also the administrative cost, which is--

Zack Cooper: I want to talk about that. To take the profit margins of the big nationals, [unintelligible 00:17:30], they're 3% to 5%. In fact, they've actually gone down over the last 15 to 20 years. Profit margins at these companies are relatively low compared to other companies of that scale. They're going down over time. We think about the driver of the growth in health care spending, and I have some work on this going forward- excuse me, insurance premiums, and I have some work on this coming out in the fall, 92% of the growth in premiums is driven by growth in spending. I don't think this is a supernormal profit issue.

Then we've got to move into this question about administrative costs. Here's where things, I think, get very nuanced. It is one of the differences between the US and other countries. We do spend more on administration. The question is, what does the administration get you? When we look domestically, I think the best thing we can do is compare Medicare Advantage and Medicare Fee-for-Service. Remember, Medicare prices are regulated. The only thing that drives spending is quantities, how much people consume in different places.

When you drill down to it, Medicare Advantage plans, on average, spend less per person on health care than Medicare Fee-for-Service. Why do they do that? It's, in a sense, because of the administrative costs that you've cited. They do things like prior authorizations, which piss everybody off, but do manage to constrain quantities. They do disease management. Kind of a pain, but it works.

They spend less per person, but federal spending on them is markedly higher. Why is that? Well, one, we, as a government, have chosen to subsidize them, which is a policy choice. Second, they gain risk adjustment. When you have insurers competing, the incentive is to compete over who you insure. I want to avoid the sick patients and focus on the low-risk patients, get them in my risk pool. We don't want that to happen, so now we risk-adjust the payments we make to insurers. Turns out the insurers are pretty darn sophisticated at getting around that risk adjustment, so they get massive, bloated payments.

I think some of the admin costs do certainly go to the gaming. Some of it goes to, in a sense, making care more efficient. Now, the question is, do we want insurance companies in the first place? I think the debate here is let's juxtapose what's happening in the US with what's happening in England where there largely isn't a plurality on the purchaser side. They actually have started moving in that direction by basically giving purchasing power more and more locally, which is a different form of insurance competition.

Why do we want insurance competition? Different benefits designs. We want it for different ways to potentially control what gets spent, to have competition over things like disease management and ways to manage care.

The question is, do the benefits of that competition outweigh, I think, the other waste that you get when you have insurance companies competing? Another way to think about the Medicare program, in Medicare fee-for-service, it's basically a check-writing machine. If one of you submits a bill, Medicare pays. Let's talk about skin substitutes. This is, for anybody listening out there, the most wild story of what goes wrong with regulated prices and why I, as an economist, do think we should probably move in that direction, but I want us to move there with a whole lot of trepidation.

Somebody has diabetes. You can get these ulcerative sores. Sorry, this is gross. They've come out with these think of them as the world's more complicated Band-Aids. 2018 Federal spending on these things was $300 million a year. Not that big a deal. There was a change in policy which required that Medicare, when you hear this, it's going to sound as silly as it gets, Medicare basically pays a regulated rate, but the doctor gets 6% of whatever the price is of the product they use. The rate that gets paid is a "market rate".

The skin substitutes, the market rate gets determined the first year, and they realize, "Well, wait a second, if we determine the rates in the first year, we can set the rates at whatever we want." They set them really high, because doctors get 6% of whatever they do, the doctors want to start using them. Eight years later, the federal government was spending $6, $7 billion, eventually up to $18 billion on these damn skin substitutes. The surge in spending on these things was staggering.

The current administration came in. They changed the policy on skin substitutes. It's projected to save about $300 billion over 10 years. None of that was happening in the Medicare Advantage side where there was just more flexibility. There was less lobbying over the fee schedule. Like every other economist, I do think there are trade-offs. There are a lot of virtues for having a larger role for the government. I think we should talk about it and expand it, but there are downsides. It's the lobbying, the capture, and the gaming of those fee schedules that you just do not see in the private markets in the same sorts of ways.

Bethany McLean: When the tragedy at UnitedHealthcare happened, I was shocked at the anger at insurers. It's interesting hearing Luigi talk now because I think during the course of my work on my last book, I had become angry at the hospitals for the way in which they have gamed the system, maybe that's too pejorative, through mergers and through then forcing the insurers in order to accept much higher prices because of this idea of must-have hospitals in a network.

I know you focused a lot on the lack of antitrust enforcement in the hospital sector. If you had to think of a chicken and egg or original sin question, does it begin with the hospitals or does it begin with the insurers? How do you think about that division of responsibility, or are they both playing a game that they have no choice but to play in order to contract the other's power, and somehow that's become a destructive game?

Bethany McLean: Yes. First, Brian Thompson's murder, I think it's worth just saying, that was nothing other than dumbass murder. There's nothing that can justify it. The guy who did it, if he's guilty, should go to jail. I think what's staggering was that 40% of folks under 30 thought the killing was justified. I think we have to listen to that. I think we have to ask. Certainly in the classroom is what we're saying, but also just what the companies are doing and what's happening in the country that's gotten there.

In a world where insurance premiums are $27,000 for a family of four, out-of-pocket maximums are about $15,000 when the average family only has $8,000 in liquid assets, that's how we get here. I think in some ways, it's a barometer for the frustration and the discontent that's out there.

I think one of the things that makes health care so important to talk about is the chicken egg question that you're bringing up. I don't think either side has a monopoly on virtue or a monopoly on vice. I think what's so frustrating is both seem to do well, no matter what happens, as the American public suffers. My work suggests that the rising cost of health care within the context of employer-sponsored health insurance makes it the leading driver of income inequality.

I don't know if there's a who's to blame culprit. I think we're all in this together. It doesn't feel like either of those groups in any way, shape, or form is really thinking about the best interest of the country or the American public. You think about what happens in Capitol Hill. I got asked by a very wealthy philanthropist, if they gave me a very large amount of money to fix health care, what would I do? The number was 300 million, so a lot, but not enough to- you're not going to create a new industry out of 300 million.

What I said is, "What we want to do is create a constituency for efficiency." If you're a staffer in DC, you're inundated with lobbying from health insurers and from hospitals and from physicians. Turns out the health care sector spends more on lobbying than any other sector in the US economy. There's nobody there who's advocating for efficiency and saying, "How do we rationalize this?" I think that's problematic.

Often when we see reform, and I think that's actually the big risk right now, what we go after are the parts of the system, understandably, that are the most frustrating. Prior authorization right now, that's what folks are talking about. There are abuses of it. It's profoundly frustrating. We also have to say at the same time that if we got rid of prior authorizations and we don't address things like the cost of care, what you're going to see is insurance premiums go up, not down. More people in this country priced out of health care services and more job losses that come from premiums going up.

Luigi Zingales: You have done a lot of research on the effect of competition in the market for health care. Actually, I want to discuss a paper of yours that sounds very familiar to me because I have an insurance, Blue Cross Blue Shield, that allows me to go wherever I want, but my general practitioner, who used to belong to one particular network, whenever he was giving me recommendations, I saw something funny that she was printing the schedule for all the recommendations, et cetera. Then by hand, he was writing some other recommendation out of network.

Then she changed network, and now there is AI that listens to the conversation in order, of course, to improve medical care. Then what I discover is that she was unwilling to give recommendation out of network. I'm surprised. Can you explain to listeners how your paper is linked to this idea?

Bethany McLean: I think one of the things that's really surprising when you say it to doctors is that doctors are influenced by financial incentives.

Luigi Zingales: It's a consolation. Economists don't think they are affected by financial incentives in their research.

[laughter]

Bethany McLean: No, Luigi, I'm not at all. Maybe you are. It's not me. I'm in this purely for the love of the game. We look at what happens when- and I think this is the paper you're talking about, what happens when physicians get acquired, they merge with hospitals and how that shifts what they do. It shifts it very markedly.

Take cesarean sections as an example. The US has some of the highest cesarean rates globally. There are lots of reasons why if mom's given birth, she may not want a cesarean section. It leads to some downstream consequences. It's a real medical procedure. We've seen this literature develop about how this is pretty problematic for both mom and baby if it's not medically necessary.

I see a marked increase in the rates that OB-GYNs are doing cesarean sections when the ownership of their practice changes and they get bought by a hospital. Why? In a sense, it brings a whole lot more revenue to the hospitals themselves. We see that when physicians get bought by hospital practices, that's where they send their patients. I think incentives matter for physicians the same way they matter for economists, and amazing journalist, too.

Zack Cooper: [laughs] No, never. I am pure as the driven snow. Luigi's going to scream because I always have to find a way to work this question into basically every podcast we do. It also is actually how I first encountered your work, which was your work on surprise billing, which was driven in part by the private equity acquisition of emergency care groups. How do you think about the infusion of private equity money into our system overall? Is that a good thing? Does it bring some of the efficiency we wanted, or is there a place for what people would describe as capitalism on steroids in a business where the trade-offs are actually sometimes people's lives?

Zack Cooper: I'm going to give an answer that I think is different, potentially, than you expected. It might frustrate Luigi a little bit. [unintelligible 00:30:19] I'm not as worried as everybody else is about private equity. I think we talk a lot about private equity in healthcare because it's easier than talking about the real culprits that are raising the cost of healthcare. I think 40% of our healthcare spending in the privately insured happens in hospitals. 60% to 70% of hospitals are nonprofits. That's where the spending is. That's just a tough thing for us to talk about. Boy, it's easier to talk about the Vikings at Cerbern or something, or Cerberus Capital.

Now, I did a bunch of work on surprise medical bills. This is this weird phenomenon, uniquely American phenomenon, where hospitals and physicians independently negotiate with insurance companies over network participation. It's an emergency. You go into a hospital. It turns out you can go see a doctor in an emergency room who's not in the same network as the hospital where he or she is working, which is just bananas. It's just a pure market failure.

We're getting more and more into it. I read a paper, first in the New England Journal of Medicine, that found this was happening 20% of the time, which is nuts. I keep digging in, and it turned out two companies were behind the lion's share of this out-of-network billing. One was called TeamHealth, and one was called Envision Healthcare. I'm involved in so much litigation around this that I'm just giving them more material now for when this eventually goes to trial, if it ever gets that far.

Both firms had bounced around the public markets and private markets. Eventually, they were owned by KKR and Blackstone. Look, in some ways, the worst of what they were doing is actually happening when they were publicly traded. I think in some ways, what was astounding with private equity was they bought them right before they circled the drain and went bankrupt. I view private equity and surprise billing as evidence of, boy, these guys made some wildly stupid decisions about what to acquire. I think it was envisioned that the bond yields were down at Bolivian currency territory. It was $0.83 on the dollar at some point.

There's a lot of research, I think, since I did the surprise billing work, that's come out on private equity. Some of it's good. I think there's pretty good evidence in the nursing home space that private equity acquisitions don't lead to great outcomes. I think there, it makes a lot of sense. That's a market that's dominated by public payers. The reimbursement rates are fixed. If you want to make money, you basically just have to lower costs.

I think there's other work. I think, Luigi, it's a bit of an indictment of our profession, frankly. My work, it was a top five. It ended up in a good journal. It was a lead story on the front page of The Times. It led to a bit of a cottage industry of writing these types of papers, going after particular companies, because I think it was viewed by folks as having high returns within the profession. There are some studies that just shouldn't have been published. Some of these are ones that I frankly can't replicate. I'm doing a bunch actually looking at private equity now, and the stories are pretty mixed.

On aggregate, I don't really find much. There are parts of the healthcare system where quality is really tough to measure, and the folks accessing care are pretty vulnerable. I think I don't want turbocharged incentives for any entity, whether they're public or private. There are other parts of the system. Ambar La Forgia is out of Berkeley, and she's got some amazing work looking at the IVF industry, where there actually has been a lot of private equity, and she finds that quality gets better.

I think, big picture, I don't stay up at night worrying about private equity. I worry about why health spending is what it is and how I think it's undercutting the American dream. It gets back, Luigi, to one of your questions before. If the US healthcare was a country, it's the third-largest country in the world in dollar terms. It's just behind the US and China. It's bigger than the economy of Germany.

There's dumb stuff that happens in dark alleys in Germany. It turns out there's dumb stuff that happens in dark alleys in the US healthcare system. Private equity is doing some of it. Nonprofits are doing some of it. I think we've got to tamp that out. I don't think the one thing standing between us and greatness is the ownership structure that we see on the provider side of the [inaudible 00:35:11].

Bethany McLean: Damn it.

Zack Cooper: If only. Our jobs would be easy.

Luigi Zingales: I think that you're very wise in presenting these things. On the other hand, the differences between the other countries and the United States are so stark in terms of cost and so terrible in terms of outcomes. I saw this statistic comparing the life expectancy in the UK and US. We all think that the UK has this terrible medical insurance, but even at the highest level of income, the US are below the UK, which is pretty remarkable.

Zack Cooper: What you're raising, these are the key points. By the way, this is the most fun podcast. This is like a Chicago seminar in podcast form. Life expectancy is different, but we've got to be really clear about why it's different. The US lags behind other countries. The chief causes are homicide rates, vehicular accidents, overdoses, and suicides. A lot wrong in the US healthcare system. It isn't what's causing us to have highways that are unsafe. A lot wrong in the US healthcare system--

Luigi Zingales: You're a little bit too generous because, number one, overdose. The healthcare system has a lot to do with it because the opioid crisis was created by healthcare and the healthcare system.

Zack Cooper: Yes. Let's be honest about what it was caused by. It was the marketing of OxyCon, which planted the seeds of it. Then I think very fertile ground, which is, in a sense, profound income inequality, a life that got very, very hard for basically folks without a college degree in the US. If we'd had single payer, I don't think that's stopping it. There are lots of reasons the US healthcare system needs to be fixed. I think we're going to be in a whole world of hurt if our goal for reforming the US healthcare sector is fixing life expectancy, like what is going on with gun policy.

Bethany McLean: Let me stop you with a quick question there because I think that does contradict a little bit your earlier point, which is that the problems in healthcare have caused or have been a primary cause or driver of income inequality. If that income inequality is a driver of life expectancy and less happiness, then it does loop around in the end to the healthcare system.

Zack Cooper: Yes. I think that's totally fair. One of the things I talk a lot about, let's talk about the income inequality component, because I think the economics here are really, really fascinating. Wages vary a whole lot inside companies, and premiums for health insurance don't. Take an average college-educated worker makes about $100,000 a year. Let's say their premiums are $9,000. The average non-college-educated worker makes $50,000. They're also paying $9,000 in premiums. As healthcare gets more expensive, it's disproportionately more costly to ensure low-income workers.

A different way to frame it is I can let $100,000 worker go, and I can save $9,000 in premiums, $109,000 total. I can let two lower-wage workers go, save $50,000 each in wages and $18,000 in premiums. The theory on that, it's basically like a head tax. We all think that head taxes are supremely regressive. It turns out employer-sponsored health insurance is extremely regressive. When you look at the growth in healthcare spending combined with employer-sponsored health insurance, that's what's making it the leading driver of income inequality. I think the link between that and life expectancy is maybe a little more-

Bethany McLean: More tenuous.

Zack Cooper: -a little more nebulous, but I'll give you a different version. To [inaudible 00:39:18] frustration, they made us take us out of the American Economic Review version of the paper, but we traced through how hospital mergers affect wages and employment across the country. What you see is that an average merger is going to lead to huge numbers of job losses outside the healthcare sector because it makes the insurance premiums more costly. When insurance premium is more costly, it's more costly for employers to retain workers.

The crazy part is we end up seeing that suicides and overdoses go up. That's, in a sense, because losing your job is terrible, particularly terrible for men. You see all this consolidation in the hospital sector. We show very, very clearly the merger in Terre Haute that's going to go through this year. It's going to lead to about 800 job losses in this pretty smallish town or city in Indiana. It's going to lead to about two suicides or overdoses. It's deeply ironic that the institutions that we're turning to that are most vulnerable are, to put it indelicately, killing the public.

Luigi Zingales: I respect that, but I think that you are underplaying the role of the healthcare industry in life expectancy. Let me give you three examples. Number one, the World Health Organization as a measure of preventable death. The country like Japan and Israel have 130 preventable deaths per 100,000. The United States has more than three times as much. That's number one. Number two, you are talking about merger. We know that the industry for dialysis has consolidated excessively. We know that when there is this consolidation, actually, we observe an increase in death of patients that are on dialysis.

Number three, the number of mothers who die giving birth in this country is unbelievable. It's at a developing country level, when in nearby Cuba, which is not really a rich country, they do much better. Why this is not part of the healthcare industry responsibilities?

Zack Cooper: First, I don't disagree with anything you said, causality aside, but I don't disagree with anything you said vis-a-vis the burden of illness, maternal mortality. Where I guess we're seeing this slight division between the two of us is what we put under the cultural aspects of the US, our history of deeply problematic race relations in this country. It's sort of the wider world of health that we engage with and the healthcare system. I view the [unintelligible 00:42:27] I think where one draws the boundaries for a healthcare system.

I don't disagree that all of those things matter. I think when it comes to, say, maternal health, where is the problem, is the genesis, what shares culture, and very real questions about trust for institutions. To what extent is it that versus the institutions themselves? I think the answer is probably both. I think it's more nuanced than saying if we got the English National Healthcare System and we dumped it into Albany, Georgia, or dumped it into Florence, Alabama, that we're going to see maternal mortality look similar. I think we have to address it. I think it's pretty darn complicated.

Bethany McLean: I had a last question maybe for both of you, and it might be outside the scope of this podcast, but it was something I was thinking about as we were talking. Part of the conversation at the Stigler Center conference was about the growing number of jobs in healthcare and how to make those jobs good jobs if those are going to be where a lot of jobs are in the future. Doesn't that run directly counter to cutting healthcare spending? In other words, if growing healthcare spending is this dramatic problem and we want to make it grow less, but we also want jobs in the healthcare sector, especially lower-paid jobs, to be better and to pay more, how do we make that work?

Zack Cooper: With great difficulty. I think this is the challenge the architects of the Affordable Care Act wrestled with. They were in a massive recession, depression. The question was, if you really tightened up on healthcare spending, then what would you do to the rest of the economy? We see that a dollar increase in healthcare spending takes about $1.33-- When it's driven by household mergers, it takes about $1.33 out of the rest of the economy.

I think some of the growth we've seen lately in the labor market, vis-a-vis healthcare, has been carers. I think that is different. I think it's a question of what part of the healthcare system we see the labor market growth. What scares me a little bit about the hospitals is we know where the money comes from. It's workers earning less than $100,000 who are paying for it with employment. I'm doing some work, thinking about where it's going. It typically goes to the upper end of the income distribution. At hospitals, that is a recipe for disaster.

I think long-term care, which is a huge issue we face domestically, is understaffed. I think those jobs do look different. I think there is scope for that to, at least, not drive up inequality, but be more like jobs we think of in the service sector.

Luigi Zingales: I have a challenge and a suggestion. The challenge is you find a sponsor that does this field experiment in which we parachute free healthcare with Cuban doctors in Alabama or Georgia, and we look at mother mortality in delivery, and I'm prepared to bet substantial amount of money that we reduce massively. You're saying no because it's a cultural issue. I think that that's really an interesting challenge.

The suggestion is that when I was listening to your work and the problem of healthcare, I come, of course, from the financial world. I think that fiduciary responsibility is often used to reduce some of this problem. Not that it's perfect, but reduce. I think that one idea is why don't we impose on doctors a fiduciary responsibility, that they should recommend whatever they will do for themselves.

We have a very simple way because we can check what they do for themselves. Do I recommend the most expensive healthcare, or if I do something else, why do I recommend to other? Do I recommend to go to that particular doctor, but I don't go to that doctor? We have the record of how they treat their family, and so that's a useful benchmark for how they should treat their patients.

Zack Cooper: I think it's, in some ways, the perfect question. I would love to do that randomized trial. I don't disagree that we might see some life expectancy gains. I thought you were going in a different direction with the fiduciary obligation. It had me thinking, and I actually think we ought to think and talk more about it. I want to see the fiduciary obligation towards employers and health insurance. I think the challenge when I think about doctors is what makes me really interested.

I went to UChicago for undergrad, and I was not an econ major. I loved philosophy, and that's what I think piqued a lot of the interest in what I think about today, is that there are a lot of really challenging philosophical and moral questions in the healthcare sector, and I think their intersection with economics is fascinating. One of the chief ones is what's good for individuals isn't necessarily good for everybody. The world where we say, whatever we do for you, we want you to do for everybody else, it's not always clear that what they do is evidence-based and that more isn't necessarily better.

Some of these really, really high-cost drugs, I think they provide a really good answer to how we think about this, which is they extend life often by pretty marginal amounts at huge costs. The question is, how do we think about who should make the decision over who gets what? I think in many ways, if you ask the doctors, they're going to make a decision about the person in front of them. That might be the right decision in that instance, but that isn't the right decision socially. In other countries, we're much more comfortable, take England as an example, saying, "Look, we're not even going to let the doctors make those choices."

A drug like bevacizumab, Avastin, for certain types of lung cancer, extends life by a month or two at costs of hundreds of thousands of dollars. We do it in the US. In England, initially, they said no. I think it's confronting those tensions that make this work incredibly nuanced, for me, fascinating, morally complex, and what makes the study of the economics of healthcare different than a lot of the other topics that we all engage with in our day-to-day.

Again, at least vis-a-vis fiduciary obligations, I want to see them for insurance. I think the thought exercise I give my students is, what would happen if health insurers had to sell life insurance at the same time? How would that change what they did? I think that's where I'd want to see some of the big changes in duties and obligations.

Bethany McLean: I like his nuanced approach to things, and I like his incremental attitude, I guess is frustrating in some ways because you want there to be some big, giant, wonderful fix to the problems that plague our healthcare system, but I think that there is not, and that it's more practical to look at the small bites that he suggests.

Luigi Zingales: I am a bit frustrated by the incrementalist approach, and maybe he's right, and I'm too impatient, but also, I'm a little bit frustrated by everybody in economics seems to blame the neighbor, but not themselves. A couple of weeks ago, we interviewed Steve Kaplan, and Steve Kaplan said, "Oh, of course, private equity is perfect, finance is perfect, but healthcare, a bit screwed up." Then you interview Zack Cooper and say, "Look, there are a lot of problems with mergers, and they kill people-- because they kill people because they leave unemployment, but healthcare doesn't kill people." Everybody is very happy to find problems in their neighbor's yard, but not in their own.

Bethany McLean: I did appreciate Zack's nuanced answers. For example, I would have thought that he would have been far more massively critical of the healthcare system, and I thought his point about there being underlying problems in America that have made healthcare more difficult here is actually very fair. There's a lot of truth in his nuance.

Luigi Zingales: There is a lot of truth, but I think he went overboard, at least in the area I know a little bit more, which is the one of opioids. You know that the opioid crisis mostly affected white people and not Black people. Black people got unemployed, too. Why only affected white people? It's because doctors tend to be racist and not prescribe opioids to Black people because they naturally abuse them, and they prescribe them more massively to white people. As a result, once in a lifetime, Black people were preserved by this racist, and the white people were affected.

This is to say that really, the massive prescription of opioid is the major cause of the opioid epidemic. Of course, unemployment, all the other stuff did not help. However, the massive thing is there, and just blaming unemployment and et cetera, I don't think is fair.

Bethany McLean: I hear you, although the opioid crisis is its own ball of wax because there were so many cries to treat pain, and then so much pressure on hospitals and doctors to prescribe things that would treat people's pain. Of course, all of that can be traced back to lobbying from Purdue and other companies. I think the real thing to blame there might be corporate influence and power and greed rather than the healthcare system, per se. I'm not sure most doctors and hospitals stood a chance against the combined onslaught of the opioid industry.

Luigi Zingales: No, but I'm sorry to say that's part of the healthcare system that is very much for profit, and as a result, is particularly sensitive to this lobbying. I'm not saying it's only fault of the healthcare system, but the healthcare system we have is really prone to these abuses in a massive way.

Bethany McLean: Yes, I'm not sure that the for-profit element of the healthcare system made that any worse or any better than it would have been, because if the companies like Purdue had been selling their products into a not-for-profit system, Purdue made a lot of money on dispensing the opioids, but I don't know how much the hospital system made on dispensing the opioids. Actually, that's a really interesting question. I've never seen those numbers. Were they prescribed at a huge markup so that hospitals made money too, or was it just Purdue? Anyway, but that's--

Zack Cooper: I can tell you, certainly, pharmacists, that's the reason why they got sued. The pharmacists have some responsibility in overseeing the prescription they handle. There were internal memos, for example, at Walmart, where low-level employees were signaling to the headquarter that there were some pill meals. There were some doctors that were offering thousands and thousands of prescriptions, and they were reported by the low-level employee to the upper-level employee of Walmart, and the upper-level employee said, "No, don't worry, we're here to sell some--"

Bethany McLean: I know, but that's not the hospital system. I mean, my turn to be pedantic, sorry. That's--

Luigi Zingales: It's the healthcare system-- The pharmacy is part of the healthcare system.

Bethany McLean: It's not hospitals and doctors. I hear you, I know, and we're going down a little bit of a rabbit hole. Anyway, what else did you find interesting?

Luigi Zingales: The other thing that is making me a little bit desperate, we interviewed Amy Finkelstein last year. These are basically the two world experts in healthcare. If even the world experts don't have a solution, where are we?

Bethany McLean: Yes. I think, unfortunately, the system is going to have to completely head into crisis, and then it will have to all get ripped out and replaced with something else. I don't know that anything will get done unless there is an out-and-out crisis. I grew up in a family of doctors. My dad was a doctor, my grandfather was a doctor, my sister is a doctor. When I was growing up, for sure, my dad would rant and rave about socialized medicine in Canada. We lived in a small northern Minnesota town, and people would come over the border from Canada to have their eye surgery, their cataract surgery done in the US.

I would say both my father and my sister now argue in favor of socialized medicine because it's just been bastardized so badly by all the money people have taken out of it, whether it's the insurers or for-profit hospitals. To watch that switch over the course of my lifetime is really interesting, and I think speaks to this broader idea that we talk about on this show, which is that people who want to defend capitalism should play a role in making the system more fair. Otherwise, they're going to find themselves the victims of the very system they depend upon to make their money getting ripped out in front of them.

I think the healthcare system might be an example of that, where even people who are rapidly against socialized medicine have just watched in horror the profit extraction over the last decades and have completely flipped on that. Does that make sense?

Luigi Zingales: Yes, but Zack defended even UnitedHealthcare.

Bethany McLean: Yes. I don't know enough about UnitedHealthcare. I only know what I read. I've never delved into it. I think there is this very underappreciated, people tend to either pick UnitedHealthcare as the bad guy, or they tend to pick hospitals as the bad guy, or they tend to pick private equity as the bad guy. I didn't so much--

Luigi Zingales: I know. Which one do you pick?

Bethany McLean: That's why I actually appreciated Zack not playing into my preconceptions or my desired answer. It's the micro version of what you talked about at the beginning of this, where you said that everybody points their finger at the healthcare system, so that it's somebody else's problem. I think when people look at healthcare, everybody tends to have their favorite villain, and that lets the other villains off the hook. I didn't take what Zack said so much as defending UnitedHealthcare as I did him saying, it's way more complicated than just pointing a finger at UnitedHealthcare.

Luigi Zingales: I think you're right. However, my reaction, and maybe it's unfair because I react to a group of people rather than just the poor Zack, but my reaction is when you start saying it's complicated, it's also a code name to say we can't do anything, and nobody's to blame, and we should all be nice with each other.

Bethany McLean: No, you're right. I have often invoked that in different situations, and I agree with you. The two curses in the modern world are saying it's complicated and saying we should start talking about X, Y, and Z because talking about X, Y, and Z never did anything, and saying it's complicated. You're exactly right. It's a duck. It allows everybody off the hook. I agree with you, too. How's that?

Luigi Zingales: In university, when a dean or a president appoints a committee, it's because he doesn't want anything to be done. As Ross Perot was saying, if you see a snake, you don't appoint a committee on killing snakes, you kill the snake. [laughs]

Bethany McLean: When a journalist writes, we need to start talking about X, Y, and Z, you know that there are no good ideas to solve X, Y, and Z, because otherwise we'd do it instead of talking about it.

Luigi Zingales: Absolutely. I think that the point-- and I'm being a bit unfair with Zack, because the one point I agree 100% is that the origin of the sin is the fact that there was tax deduction for healthcare. As a result, there are two things. Number one, we buy too much of it. Number two, we're not sensitive to the price of it. The problem is if you eliminate immediately tax deduction, people would revolt. If you start paying people or charging people directly, they will revolt. The only solution, at least temporarily, is to say, we give you tax deduction, but the company has the freedom to offer you money and different healthcare plans.

Then to offer everybody the option to buy into Medicare at a particular price. I think a lot of people would choose to buy into Medicare and to get the money in exchange. That will break the system.

Bethany McLean: I like that idea. I was going to take a much smaller piece of it, which is just getting rid of employer-sponsored healthcare.