UPDATE: The eight questions I addressed below were obviously from John Mackey’s op-ed in the WSJ. Now his leftist customers at Whole Foods Markets are going nuts and threatening to boycott the store. OK by me. I thought the criticism was rather mild and I don’t shop there anyway. It does show the madness of these groups, though.
The Obama campaign seems to be morphing into “insurance reform.” There are lots of mis-statements about insurance out there so I thought I would consider some. One, of course, is the gigantic profits of the insurance companies. First of all, almost all employer based health plans are NOT insurance but are prepaid care managed by an ASO (Administrative Service Organization), almost always an insurance company. Why ? because they have the skills to do this sort of thing. There are two ways that these companies make money. One is to invest premiums and pay benefits out of investment income. That is how life insurance and fire insurance works. Long ago, that sort of thing came to an end with health insurance. Why ? Because health insurance stopped being insurance.
How does a conventional insurance company make money ? Let’s take fire insurance which was founded in this country by Benjamin Franklin. The concept was a mutual company. A group of homeowners paid into a fund that was to be used to pay for fire damage. It also paid for the fire fighters and their equipment.
The first policies had a term of seven years. After the policies expired, the premium money was returned to the policyholders. In the first year of operation, 143 policies were written. Ironically, there wasn’t a single insured property that caught fire in the Philadelphia Contributionship’s first year of operation.
What did they do with the money ? Well, if I know Franklin, the money was invested in the colony and the income from the investments was added to the fund, also called “the corpus.” Since they had no fire, the money was all returned to the investors with interest. This is how mutual insurance works. Blue Cross and Blue Shield are non-profits that were founded by the hospitals and the medical associations to pay medical claims. Mutual companies like this have no profits to distribute as they are owned by the policy holders.
What about Aetna and the other for-profit insurance companies ? Many large assets in the country are owned by these companies as they have, in the case of life insurance especially, a long period in which to earn the money to pay claims. Actuaries are economists who estimate the probability of loss for a particular insured. If I am a 40 year old male who doesn’t smoke, they can estimate my annual risk of death with considerable precision. They set the annual premium and the benefit paid can be even more than it would be if I saved the premium for 20 years. That is because of the investment income.
They can also estimate, with considerable precision, my risk of a heart attack or a stroke or even cancer. In the days before 1970, when insurance only covered events like heart attacks and strokes, it was possible to estimate these risks and to set up a table of premiums that were predictable. Even if medical prices rose, there was a way to deal with that. In 1970, many health policies were of the indemnity type. That means they paid a fixed dollar amount for a medical event, such as an operation or a hospital stay. In those days, hospitals usually billed by the day rather than the enormous, and unintelligible, itemized bills we see today.
Furthermore, for the past 25 years, those bills have meant almost nothing. The insurance companies, and after DRGs came in, Medicare, pay a fixed amount per hospital stay based on the discharge diagnosis. Outpatient surgery has become popular as a way to avoid those limits and the inefficiencies of hospitals, but that also involves contracts that include huge discounts on the “retail” price seen on the bill.
Soon, the indemnity insurance policy went into decline because they often did not keep up with doctor’s rising fees. This was a serious mistake on the part of doctors as they were agents of their own (or at least their successors’) destruction. Had the insurance companies held the line, the doctors would have had to negotiate with patients for the balance over what the policy paid. That might have required explaining why the operation was worth so much. It would be uncomfortable and it was much easier to get them to pay “UCR” rates. That stands for “Usual, Customary and Reasonable.” It’s amazing how fast “customary” can increase once the limits are off.
The insurance companies foolishly insisted on itemized bills from the hospitals and the explosion of health care inflation took off. Medicare paid the going rates for a while. I began practice in 1972 and my partner and I set our fees according to the book of rates called the Relative Value Scale established by the California Medical Association, and called “RVS.” It was begun in 1952 by a group that wanted to set up a fee schedule that could be used by any doctor in any community. The schedule simply ranked items relative to each other. It began with a “hernia unit,” the value of a hernia repair compared to other services like office visits or open heart surgery. Maybe a hernia repair is worth one tenth of a heart surgery. The young physician then took into account the cost of practice, rent and so forth, and decided on a “conversion factor.” The conversion factor for us was $100. If the RVS book said a hernia repair was 4.5 RVS units, our fee was $450. We were on the low end of the scale but did well because we were busy.
Anyway, that system worked pretty well and even Medicare adopted it in spite of the fact that the FTC sued the CMA and forced them to stop printing the RVS Schedule and then even required that they recall all the copies in existence. If you would like to consider how illogical government can get, think about doctors using Xeroxed copies of the illegal RVS schedule to submit bills to Medicare, which required the correct numbers to pay the bills.
Anyway, the real problems began in the 70s when the Nixon administration decided that the way to control costs was the HMO. Paul Ellwood provided the theoretical foundation for the concept. He based his concept on the Kaiser Foundation and the original program devised by surgeon Sidney Garfield for the California Aqueduct and the Grand Coulee Dam, the latter built by Henry J Kaiser. The HMO provided prepaid care for a monthly fee and the doctors were on salary.
Private practice pediatricians and obstetricians were worried because health insurance did not pay for their services. After all, these were not insurable events but routine care. Here, the fatal decision was made and I remember debates in the House of Delegates of the CMA. The CMA must act to protect its members and demand that insurance cover well baby care and routine delivery. I objected but, of course, I was a surgeon and we lost the debate. This was the beginning of the end because, once prepaid care was substituted for insurance, there was no way to stop the inflation. My younger son was born at Huntington Memorial Hospital in Pasadena in April 1969. This was the nicest hospital in the area and the maternity ward was new and beautiful. The hospital bill for mother and child was $375. Five years later, with insurance coverage now universal, that bill would be ten times as much.
I’m sure those who are still reading this are tired of the history so I will consider one proposal being discussed as an alternative to the Obama program.
Here are eight reforms that would greatly lower the cost of health care for everyone:
•Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs).
This would be helpful but far less important unless we get rid of the false “retail prices” that everyone sees on their doctor and hospital bill. To give one small example: I am a Medicare beneficiary now. I also have chronic pain as a result of a back injury and an extensive surgery in 1993. I go to a pain specialist. At hand, I have a May 25, 2009 EOB (Explanation of Benefits) from Medicare. He billed $140 for an office visit. The Medicare payment was $13.90; less than 10% of billed charges. They proudly list the amount I am NOT required to pay him as $126.10. He cannot bill me for the balance. Why not ? It’s illegal.
Let’s say that my pain doctor drops out of Medicare and goes to a cash practice as many internists are now doing. He could set a fee somewhere between what Medicare won’t pay him and what they do pay him, and then I could pay that amount myself and forget Medicare. Soon, that may be the only option as more and more doctors drop out of Medicare. Soem primary care internists are setting up “retainer practices.” Of course, some object to this as elitist.
UPDATE: President Obama has twice made inflammatory and ignorant comments about surgeons the past several weeks. Today the American College of Surgeons, which has been supporting his agenda, finally lashed back at him. It’s about bloody time. First, surgeons do not get the hospital bill as payment. Second, surgical fees and hospital bills have little to do with the “retail” prices that are printed in so many commentaries by non-medical people.
•Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits.
That may help although one reason why employer plans get better rates is the fact that a fully employed population is a better collective health risk than individuals who may be of varying states of health. I do agree that health care expenses should be tax deductible.
•Repeal all state laws which prevent insurance companies from competing across state lines.
This would make a huge difference but only a revolution could bring this to pass. Politicians serve no purpose in life except to do favors for contributers.
•Repeal government mandates regarding what insurance companies must cover.
This would accomplish even more for costs but it would be even more difficult to enact. I spent eight years on the CMAs commission on legislation. I saw how sausage is made.
•Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year.
I tend to think this is less important but that may be because I live in California which did a major tort reform in 1975 and has held the line well on malpractice rates. I have some other ideas on this but this post is already too long.
•Make costs transparent so that consumers understand what health-care treatments cost.
I think this is key and the reason for the lengthy post above.
•Enact Medicare reform. We need to face up to the actuarial fact that Medicare is heading towards bankruptcy and enact reforms that create greater patient empowerment, choice and responsibility.
Yes but this has to come from the same reforms we enact for the whole system.
•Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance and aren’t covered by Medicare, Medicaid or the State Children’s Health Insurance Program.
Nice but fluff.
I think we are headed to a market-based health care system whether or not Obama gets his bill passed. In Canada, it is happening even though it is technically illegal.
UPDATE: This is an interesting analysis of the proposed reform program. The premise is that what is going to happen, if it passes, is a commingling of all the different health care accounts, Medicare, Medicaid and middle class, pitting the classes against each other. I think it shows considerable insight.
Tags: health care, medicine, politics, science
I like the work you’ve done on your site – are you having fun with it? It’s interesting and well worth the time to visit.
“Blue Cross and Blue Shield are non-profits that were founded by the hospitals and the medical associations to pay medical claims.”
Not to be too suspicious, but this almost seems made-to-order to cause medical inflation.
But, interesting stuff as usual, Doc. My mother had a biopsy at Huntington Memorial when I was about 10 so my memories of that place aren’t so good.
We have 40 mandates in Montana now. I would be interested to hear which ones in Cali that you would dump and which ones you would keep, if that choice were possible.
I would dump them all and allow insurance companies to market different levels of protection. The only requirement would be to spell out the benefits honestly with no bait and switch like those phony “insurance” plans that Billy May was touting on late night TV before the cocaine got him. You could probably sell a catastrophic coverage plan for healthy 25 year olds for 20 dollars a month or less.
Yeah! I like it.