A Brief History…

There is a rather emotional cover story in the Atlantic that has been linked to by several sources using it as an example of why US health care is collapsing and in need of reform. Some of these people either didn’t read the article or don’t understand it. Let’s read it.

But health insurance is different from every other type of insurance. Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. We’ve become so used to health insurance that we don’t realize how absurd that is. We can’t imagine paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance, but we all assume that our regular checkups and dental cleanings will be covered at least partially by insurance. Most pregnancies are planned, and deliveries are predictable many months in advance, yet they’re financed the same way we finance fixing a car after a wreck—through an insurance claim.

This is exactly right and suggests one area for reform. Here is another true statement.

In designing Medicare and Medicaid in 1965, the government essentially adopted this comprehensive-insurance model for its own spending, and by the next year had enrolled nearly 12 percent of the population. And it is no coinci­dence that the great inflation in health-care costs began soon after. We all believe we need comprehensive health insurance because the cost of care—even routine care—appears too high to bear on our own. But the use of insurance to fund virtually all care is itself a major cause of health care’s high expense.

How about this ?

Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total. In 2006, it cost almost $500 per person just to administer health insurance. Much of this enormous cost would simply disappear if we paid routine and predictable health-care expenditures the way we pay for everything else—by ourselves.

The people who are linking to this article are Obama supporters. have they read it ? Or just the title.

Now for some really radical statements:

Moral hazard has fostered an accidental collusion between providers benefiting from higher costs and patients who don’t fully bear them. In this environment, trying to control costs is awfully tough. When Medicare cut reimbursement rates in 2005 on chemotherapy and anemia drugs, for instance, it saved almost 20 percent of the previously billed costs. But Medicare’s total cancer-treatment costs actually rose almost immediately. As The New York Times reported, some physicians believed their colleagues simply performed more treatments, particularly higher-profit ones.

Want further evidence of moral hazard? The average insured American and the average uninsured American spend very similar amounts of their own money on health care each year—$654 and $583, respectively. But they spend wildly different amounts of other people’s money—$3,809 and $1,103, respectively. Sometimes the uninsured do not get highly beneficial treatments because they cannot afford them at today’s prices—something any reform must address. But likewise, insured patients often get only marginally beneficial (or even outright unnecessary) care at mind-boggling cost.

Some of this I agree with and some is a matter of understanding Jack Wennberg’s research on variation in health services. Across the country, those health services that are related to unanticipated incidents, like strokes and heart attacks and hip fractures, are about the same in frequency and expenditure. It is the services that are not clearly necessary or that have less clear indications that vary so much. An example widely discussed by Wennberg is prostate surgery for benign enlargement, or BPH. There is very little variation in prostate cancer except by race as blacks have a higher incidence.

This is a shocker for the lefties:

For fun, let’s imagine confiscating all the profits of all the famously greedy health-insurance companies. That would pay for four days of health care for all Americans. Let’s add in the profits of the 10 biggest rapacious U.S. drug companies. Another 7 days. Indeed, confiscating all the profits of all American companies, in every industry, wouldn’t cover even five months of our health-care expenses.

Now for some really shocking statements:

Every proposal for health-care reform has featured some element of cost control to “balance” the inflationary impact of expanding access. Yet it goes without saying that in the big picture, all government efforts to control costs have failed.

Why? One reason is a fixation on prices rather than costs. The government regularly tries to cap costs by limiting the reimbursement rates paid to providers by Medicare and Medicaid, and generally pays much less for each service than private insurers. But as we’ve seen, that can lead providers to perform more services, and to steer patients toward higher-priced, more lightly regulated treatments. The government’s efforts to expand “access” to care while limiting costs are like blowing up a balloon while simultaneously squeezing it. The balloon continues to inflate, but in misshapen form.

I have some doubts about that statement. I don’t think most doctors consciously choose to increase volume to make up for declining reimbursement but there may be an effect that is indirect. Medicare has chosen, for example, to cut payment for vascular surgery, such as the femoral popliteal bypass procedure that used to take me four to seven hours to do. Medicare now pays less than one-fourth what I was paid for this in 1990. The intent was to reduce the motivation of surgeons to operate, especially with big lengthy cases. There has been, at the same time, a trend to interventional radiology which is displacing vascular surgery. The catheter procedures, with stents and balloon angioplasties, are popular with patients because they don’t hurt as much as surgery. However, everything I know about the billing circumstances tells me that the money spent on angioplasties and stents and other radiology procedures is far more than the surgery procedures they replace. The surgeons aren’t happy about the trend but it is certainly not one of cost reduction.

Cost control is a feature of decentralized, competitive markets, not of centralized bureaucracy—a matter of incentives, not mandates. What’s more, cost control is dynamic. Even the simplest business faces constant variation in its costs for labor, facilities, and capital; to compete, management must react quickly, efficiently, and, most often, prospectively. By contrast, government bureaucracies set regulations and reimbursement rates through carefully evaluated and broadly applied rules. These bureaucracies first must notice market changes and resource misallocations, and then (sometimes subject to political considerations) issue additional regulations or change reimbursement rates to address each problem retrospectively.

Governments are slow and stupid. Yes, some of us knew that.

These bureaucracies first must notice market changes and resource misallocations, and then (sometimes subject to political considerations) issue additional regulations or change reimbursement rates to address each problem retrospectively.

As a result, strange distortions crop up constantly in health care. For example, although the population is rapidly aging, we have few geriatricians—physicians who address the cluster of common patient issues related to aging, often crossing traditional specialty lines. Why? Because under Medicare’s current reimbursement system (which generally pays more to physicians who do lots of tests and procedures), geriatricians typically don’t make much money. If seniors were the true customers, they would likely flock to geriatricians, bidding up their rates—and sending a useful signal to medical-school students. But Medicare is the real customer, and it pays more to specialists in established fields. And so, seniors often end up overusing specialists who are not focused on their specific health needs.

Not only doesn’t Medicare pay them well, it restricts their ability to care for their patients. I have previously posted on this. A huge consideration in controlling Medicare and end of life costs is home care. Yet, home care is very poorly paid and the number of visits is restricted.

Many reformers believe if we could only adopt a single-payer system, we could deliver health care more cheaply than we do today. The experience of other developed countries suggests that’s true: the government as single payer would have lower administrative costs than private insurers, as well as enormous market clout and the ability to bring down prices, although at the cost of explicitly rationing care.

But even leaving aside the effects of price controls on innovation and customer service, today’s Medicare system should leave us skeptical about the long-term viability of that approach. From 2000 to 2007, despite its market power, Medicare’s hospital and physician reimbursements per enrollee rose by 5.4 percent and 8.5 percent, respectively, per year. As currently structured, Medicare is a Ponzi scheme. The Medicare tax rate has been raised seven times since its enactment, and almost certainly will need to be raised again in the next decade. The Medicare tax contributions and premiums that today’s beneficiaries have paid into the system don’t come close to fully funding their care, which today’s workers subsidize. The subsidy is getting larger even as it becomes more difficult to maintain: next year there will be 3.7 working people for each Medicare beneficiary; if you’re in your mid-40s today, there will be only 2.4 workers to subsidize your care when you hit retirement age. The experience of other rich nations should also make us skeptical.

I really don’t think the Obama supporters read this article before recommending it. Medicare has to be reformed before tackling the rest of the system.

Another true statement:

Well, hospitals bill according to their price lists, but provide large discounts to major insurers. Individual consumers, of course, don’t benefit from these discounts, so they receive their bills at full list price (typically about 2.5 times the bill to an insured patient). Uninsured patients, however, pay according to how much of the bill the hospital believes they can afford (which, on average, amounts to 25 percent of the amount paid by an insured patient). Nonetheless, whatever discount a hospital gives to an uninsured patient is entirely at its discretion—and is typically negotiated only after the fact. Some uninsured patients have been driven into bankruptcy by hospital collections. American industry may offer no better example of pernicious “price discrimination,” nor one that entails greater financial vulnerability for American families.

One of my pet peeves is the secrecy of these discounts and this applies to Medicare as well with respect to physician payment. If I as a surgeon offer to perform a treatment at a cash price less than my “official fee” as determined by my Medicare profile, I am breaking the law. As a result, there is considerable upward pressure on doctors’ “retail” fees at the same time that Medicare is cutting the amount that is actually paid.

Most MRIs in this country are reimbursed by insurance or Medicare, and operate in the limited-competition, nontransparent world of insurance pricing. I don’t even know the price of many of the diagnostic services I’ve needed over the years—usually I’ve just gone to whatever provider my physician recommended, without asking (my personal contribution to the moral-hazard economy).

I don’t think he realizes that Medicare will penalize such a facility if it offers a cheaper price for a cash patient. This is a reason why medical IRAs are less useful than they might be. Unless the patient goes through the insurance company claims process, the discount that the insurance company has negotiated will not be obtained. Processing the claim, even though the insurance company will not pay it, costs money in administrative expense. That’s one reason for those 470,000 insurance employees. Far better would be a system in which actual prices were public knowledge and it made no difference if you were paying cash or the insurance company was paying. Then the medical IRA would be on the same terms as the insurance company and administrative costs would really go down.

By contrast, consider LASIK surgery. I still lack the (small amount of) courage required to get LASIK. But I’ve been considering it since it was introduced commercially in the 1990s. The surgery is seldom covered by insurance, and exists in the competitive economy typical of most other industries. So people who get LASIK surgery—or for that matter most cosmetic surgeries, dental procedures, or other mostly uninsured treatments—act like consumers. If you do an Internet search today, you can find LASIK procedures quoted as low as $499 per eye—a decline of roughly 80 percent since the procedure was introduced.

The French system requires posting of all charges and allows the doctor, or hospital, to negotiate with the patient without penalty. Such a system would allow competition with newer technology.

How would the health-care reform that’s now taking shape solve these core problems? The Obama administration and Congress are still working out the details, but it looks like this generation of “comprehensive” reform will not address the underlying issues, any more than previous efforts did. Instead it will put yet more patches on the walls of an edifice that is fundamentally unsound—and then build that edifice higher.

A central feature of the reform plan is the expansion of comprehensive health insurance to most of the 46 million Americans who now lack private or public insurance. Whether this would be achieved entirely through the extension of private commercial insurance at government-subsidized rates, or through the creation of a “public option,” perhaps modeled on Medicare, is still being debated.

Regardless, the administration has suggested a cost to taxpayers of $1 trillion to $1.5 trillion over 10 years. That, of course, will mean another $1 trillion or more not spent on other things—environment, education, nutrition, recreation. And if the history of previous attempts to expand the health safety net are any guide, that estimate will prove low.

I’m sure those Obama supporters did not read this article. The uninsured are composed of three groups. One is illegal aliens and I don’t see how that problem is solved. I think Obama’s “public option” would include them since identity checks are not part of the plan. Another third are young healthy workers who choose not to buy insurance. A basic catastrophic policy would be affordable for this group and a mandate for such a policy would work. I don;t blame tem for not wanting to buy the bloated prepaid care style policies that are offered now.

How does he suggest dealing with the cost problem ?

A more consumer-centered health-care system would not rely on a single form of financing for health-care purchases; it would make use of different sorts of financing for different elements of care—with routine care funded largely out of our incomes; major, predictable expenses (including much end-of-life care) funded by savings and credit; and massive, unpredictable expenses funded by insurance.

For years, a number of reformers have advocated a more “consumer-driven” care system—a term coined by the Harvard Business School professor Regina Herzlinger, who has written extensively on the subject. Many different steps could move us toward such a system. Here’s one approach that—although it may sound radical—makes sense to me.

First, we should replace our current web of employer- and government-based insurance with a single program of catastrophic insurance open to all Americans—indeed, all Americans should be required to buy it—with fixed premiums based solely on age. This program would be best run as a single national pool, without underwriting for specific risk factors, and would ultimately replace Medicare, Medicaid, and private insurance. All Americans would be insured against catastrophic illness, throughout their lives.

Proposals for true catastrophic insurance usually founder on the definition of catastrophe. So much of the amount we now spend is dedicated to problems that are considered catastrophic, the argument goes, that a separate catastrophic system is pointless. A typical catastrophic insurance policy today might cover any expenses above, say, $2,000. That threshold is far too low; ultimately, a threshold of $50,000 or more would be better. (Chronic conditions with expected annual costs above some lower threshold would also be covered.) We might consider other mechanisms to keep total costs down: the plan could be required to pay out no more in any year than its available premiums, for instance, with premium increases limited to the general rate of inflation. But the real key would be to restrict the coverage to true catastrophes—if this approach is to work, only a minority of us should ever be beneficiaries.

I absolutely agree with this proposal. A key would be allowing the doctor and patient to negotiate on what the charges not paid by insurance will be. Right now, doctors are banned from charging more than the insurance pays.

What about routine care ?

Every American should be required to maintain an HSA, and contribute a minimum percentage of post-tax income, subject to a floor and a cap in total dollar contributions. The income percentage required should rise over a working life, as wages and wealth typically do.

All noncatastrophic care should eventually be funded out of HSAs. But account-holders should be allowed to withdraw money for any purpose, without penalty, once the funds exceed a ceiling established for each age, and at death any remaining money should be disbursed through inheritance. Our current methods of health-care funding create a “use it or lose it” imperative. This new approach would ensure that families put aside funds for future expenses, but would not force them to spend the funds only on health care.

I hope Obama doesn’t read this. He will need one of those catastrophic policies to deal with the stroke he has. I think these are great ideas for the middle class. The poor, especially the older poor, will have to be subsidized but that is a lesser problem than trying to remake the entire system in one step.

UPDATE: Here are some comments about the VA as a model for reform. I never worked in the VA but know many docs who trained there. This is a good discussion.

Tags: economics, health care, insurance

This entry was posted on Wednesday, September 2nd, 2009 at 3:04 pm and is filed under health reform. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.