Modern Health Care
From Summa Bergania
by David Bergan — November 4, 2006, revised November 11, 2006 - taking into account some conversations with Jud, Michael, and "Phadreus"
Among the greatest pragmatic problems in modern America is the issue of health care coverage. I will assume that the reader is already familiar with the situation, rather than looking up particular statistics... Following are the specific points I consider to be general knowledge:
- Private health insurance premiums are rising extremely quickly
- Hospitals charge too much for most people to be able to afford anything but routine exams without health insurance
- Doctors are in the habit of ordering additional tests, x-rays, and lab results to avoid a malpractice case
- Medical technology is forever producing new (costly) methods to check subtle conditions that may (or may not) reveal something serious
- Life expectancy is increasing
- The baby-boomer generation is getting very close to the Medicare age
Identify the problem(s)
People have been getting sick and injured as long as there have been people. And one of the beneficial side-effects of civilization is decreasing the rate of illness and injury (via sewer systems, vaccinations, FDA approval process, etc.). Therefore the issue isn't likely to be that people are getting more sick, or more injured in the 21st century than in previous centuries. True, there are some current conditions that need to be corrected (smoking, obesity), but our overall health in Western Civilization should be at an all-time high.
So why would there be a health care problem? The problem isn't that we need more health care than previous generations, but that it costs more for us than in previous generations. But why does it cost more?
Reason 1: Health insurance
As a med school student my brother Michael says he is taught that every single patient is going to ask one question to every suggested procedure: "Will my insurance cover this?"
Whenever the doctor has to answer no, it is highly unlikely that the patient will then agree to have that procedure. So the doctor/hospital obviously makes more money when people are covered by insurance. Not only are they able to prescribe more procedures (ie when you have a normal-looking mole removed, they automatically run a $500 test to see if it was cancerous), but they are also able to charge more. A patient might be willing to pay $40 to have a mole removed, but you can submit it to an insurance company for $100. The patient would be ticked if he himself was charged $100, but he isn't... And the insurance company won't gripe too loudly, because they can just raise the premiums. They usually base their "cut" on a percentage of claims... and 30% of $100 is more than 30% of $40.
The American Medical Association isn't dumb, and so they have made it their top priority to decrease the number of uninsured people.
In terms of economics, health insurance has disintegrated the standard capitalistic model. In capitalism, the consumer wins because competition drives price to an acceptable level. But because of health insurance, hospitals don't operate in a truly competitive market. When a patient doesn't pay for her service directly, she won't ask about the price, she won't shop around for the best deal, and there is nothing to keep her from going to the most expensive hospital in the region. (Actually she is most likely to go to the most expensive hospital in the region because of the perception that it would give her the best care.) In a competitive market, you see companies bragging about their low rates, and advertising coupons to draw in customers. Hospitals do neither... they emphasize "quality care", tell stories from satisfied patients, and throw in things like compliementary valet service (I kid you not, my local hospital treats you like you're in a rich hotel). When health insurance picks up the tab, a patient doesn't care about price... they care about having a good experience.
Travel agents also try to sell you a good experience, but their customers have to consider the price tag. You can get a suntan in Pheonix, and you can get a suntan in Bora-Bora... but if you aren't paying the bill, you might as well go to Bora-Bora.
Reason 2: Employer-paid plans
If you pay your own health insurance premiums, you are conscious of their increases... and to some degree you will take responsibility over the procedures your doctor prescribes, not wanting to jump into a higher underwriting category or not wanting your risk pool to pay out more than it has to. But many employers offer health insurance as a benefit to their workers as a very popular non-salary compensation. There are certainly a number of advantages to doing this from the employer's and health insurance company's perspectives. The benefit is tax-deductible, it's easier to underwrite groups than individuals, and companies are much less likely to forget a premium payment.
But for our purposes, looking at the effect on health care prices, employer-paid plans are detrimental. When your boss pays the premiums, that's one step further from taking personal responsibility. First it's, "Who cares if one extra test is expensive? My insurance is paying for it." Then it's "Who cares if one extra test will raise my premium? My boss is paying the premium." Therefore, for many people there are two degrees of separation between the free market and the health care market... two steps away from being personally responsible for the cost of your own health care.
Reason 3: Mixed market, but one price
Pretend you are the hospital's CFO and looking to maximize profits. (I'm not saying that profits are the only concern for a hospital, but there's no reason to take in only $50 for a procedure when you could take in $60... and not lose any patients.) Now let's say that your hospital collects 3rd party (insurance) payments from 4 carriers, and each carrier has decided to put caps on the amount of money they will pay for a mole removal. The cap for one carrier is $70, for another it's $95, and the other two set it at $85. By law you can only have one price for mole removals at your hospital... it's considered insurance fraud to charge a walk-in $80 and an insurance carrier $100. So if 80+% of your patients have insurance of some sort, it's clearly in the interest of profits to set your price at $100 to receive the max allowable from insurance companies. Were all payments directly from the patient, you may only charge $80... but when a couple insurance carriers have "suggested" higher rates, you are essentially turning away free money.
So it's the uninsured patient who gets burned by this process. The insurance company has the power to tell the hospital they aren't going to pay full price. Wouldn't it be nice if an uninsured patient could take their hospital bill and mark only a certain percentage of it as "allowable" and deny payment on the rest?
Reason 4: New medical technology
As explained in Reason 1, hospitals aren't competing in the realm of price, they are competing in the realm of quality. Patients aren't going to come to your hospital because you are cheaper, but because you are better. So let's say a new machine comes out that gives you a 97% chance of dectecting the early signs of emphysema. The old one gave you a 95% chance of detecting the early signs of emphysema. The new one is under a patent where the inventor charges a high up-front cost and a per-each-use fee, whereas the old one has no such succesive fee and is paid off. And once the new machine is a few years old (and paid off), it is then replaced with an even better one (97.5% dectection).
Obviously the perpetual cycle of new machines costs quite a bit more, which is passed along to the insurance company (or uninsured patient). There is never any sense in not getting the new machines, because the hospitals are competing on quality, not price. If Hospital A gets this new emphysema detector, then Hospital B has to get it, too... or suffer from the image of not having the most up-to-date technology in the region... which means less patients. There is no downside to getting the better technology, because the extra price is just tacked onto the bill, which the patient doesn't pay directly anyway.
Compare this to an airline. I'm sure there are innovations in jet aerodynamics and cockpit instrumentation on a regular basis. Ordering new airplanes every year is expensive, but we'll just tack it onto the customer's bill. Sure the old planes had a 99.999% chance of getting to their destination crash-free, but the new ones improve that to a 99.9993% rate. That kind of reasoning doesn't work... unless the customers don't have to pay for the bill, in which case they'll take the new planes.
I'm sure that you see that Reason 4 is derivative from Reason 1. If there were no health insurance, the medical technology racket wouldn't exist. Hospitals would have to balance price to stay competitive... and certain machines wouldn't justify their cost. The market would still exist, just as Intel and AMD are going to keep making better processors, even though the vast majority of users can do everything they ever wanted on the technology from 5 years ago. But upgrading medical equipment would come about as regularly as upgrading computer systems in a standard office, or upgrading 747s in the airline industry.
Reason 5: Malpractice suits
Even the best and most honest doctors are threatened by malpractice litigation. When something screws up, their only defense in court is to show that they ordered every test possible and showed the case to every specialist on hand. Once again, when health insurance is picking up the tab, there is no reason not to.
So this raises costs twofold: (A) more procedures and (B) they charge more because hospitals have to pay their own (rising) malpractice insurance premiums.
I'm uncertain as to what's the best policy here. Obviously it is important to be able to have some form of recourse against quack doctors and bad ER decisions... but the abuse of that recourse is what's driving up malpractice premiums, which drives up health care prices. And it's hard to make an accurate comparison to other industries. A shyster car salesman might sell you a lemon that needs a repair every 2 months, but he probably won't endanger your life by his incompetence or fraud. An incompetent pilot would kill himself by his incompetence... which is incentive enough to do things right. So therefore medical lawsuits are for higher amounts of money than other fraud cases because death is on the line.
Anyway, the increase of malpractice suits is certainly one of the factors contributing to higher health care costs.
Reason 6: Increased life expectancy
There is no easy way to say it: old people cost a lot of money. They have more diseases, they have more surgeries, and end up in a $74,000 a year nursing home for 2.4 years. Increases in medical technology only mean that people will live longer... translation: old people will be old longer, and more people will live to be old.
There is a potential crisis on the horizon. Once the baby-boomer generation becomes "old", they will be draining significantly more money out of Medicare than we are used to paying in. Using rough calculations based on the US Census Bureau's age projections I extrapolated the following table:
| 2005 | 2010 | 2020 | 2030 | 2040 | 2050 | ||
|---|---|---|---|---|---|---|---|
| Percent of US population by age bracket | |||||||
| Ages 0-19 | 27.7% | 26.9% | 26.4% | 26.2% | 25.9% | 26.0% | |
| Ages 20-64 | 59.5% | 60.0% | 57.2% | 54.2% | 53.6% | 53.4% | |
| Ages 65+ | 12.7% | 13.0% | 16.3% | 19.6% | 20.4% | 20.7% | |
| Estimated "worker" population (ages 20-64) (in millions) | 176 | 185 | 192 | 197 | 210 | 224 | |
| Estimated Medicare beneficiaries (in millions) | 42 | 45 | 61 | 80 | 89 | 97 | |
| Number of "workers" per Medicare beneficiary | 4.2 | 4.1 | 3.2 | 2.5 | 2.4 | 2.3 |
Because most people consider life to be sacred (I don't), they are unwilling to let their mother/father/grandmother/grandfather die unless every medical feat was performed. Within a few decades, this mindset will probably have to change. Otherwise, we could come to a point where a majority of every worker's income could be spent on sustaining their elders to extraordinary life spans, rather than meeting their basic needs and the needs of their children.
Unlike Reasons 1-3, this one doesn't affect the cost of individual procedures. Its effect on increasing health care costs is only by the increasing quantity of procedures. Including more and more elderly in your risk pool increases the number of claims paid... which raises premiums, but wouldn't raise the cost of an uninsured's trip to the doctor.
Exploring possible solutions
1) Ban health insurance?
When doctors have to look into the face of the person who is paying the bill, hospitals would charge less, and order fewer marginal tests. In essence, they would operate like a free-market business.
However, too many people are not in the habit of saving money for emergencies... and it wouldn't do to replace an issue with health care costs with an issue of hospitals going bankrupt off of unpaid balances on their books. It's not the concept of health insurance that drives prices up... it's the abuse of it. The concept of health insurance is to balance out the misfortunes of individuals who elect to pay the premiums. I have no problem with that concept. The abuse comes into effect when the hospital decides to raise prices for everyone, because most of their business comes from the insurance companies who will pay it no matter what (and turn around and increase premiums).
Eliminating health insurance could solve the problem of high health care costs. But the tradeoff isn't worth it.
2) HMOs?
Mix the hospital-entity in with the insurance-entity so that the hospital isn't charging a 3rd party higher prices... but instead charging itself. If the docs at HMO A prescribe overpriced or unnecessary procedures, they will have higher premiums in comparison to HMO B... thus driving more patients to the doctors at B. Therefore, it's in the best interest of HMO A to keep prices and utilization low.
However, while the concept is theoretically sound, in practice patients have a strong desire to choose their own doctor. So for a group of 100 employees, we can expect that 50 are going to want the doctors on HMO A and 50 are going to want the doctors on HMO B... and a significant percentage will want certain doctors for certain procedures (ie HMO A docs for delivering my baby, but HMO B docs if I have a heart attack).
Also, doctors figured out that it's to their advantage to be on all the HMO plans, not just one, because that gives them exposure to potential patients from all the HMO plans, not just one. And in other cases, the doctors figured out that it's to their advantage to be on no HMO plans, because they didn't like the restrictive reimbursement. So unless it were a law that all doctors had to be on one and only one HMO, I don't think the HMO solution would survive long-term. Not to mention that in single-hospital communities, it would do absolutely nothing.
3) Universal health care?
So how about we jettison all private health insurance, and have the government pay the doctors at an acceptable, but not excessive level? We'll have to raise taxes significantly, but on the other hand, employers/individuals would no longer pay private health insurance premiums. And since everyone would have coverage, hospitals wouldn't have to write off any uninsured patients who don't pay their bills.
Universal health care is a solution. The reason is that the government determines that it will only pay a certain amount of money for a procedure, and then the doctors have to live with that. However, universal health care comes with its own set of problems, both practical and philosophical.
Practical
- Non-emergency procedures seem to take a super-low priority and people can end up waiting as long as 6 months for an appointment with a physical therapist to work on their knees (true story: Phil Assmus in UK).
- Government money can run out toward the end of the financial year... my friend Jill who was a nurse in Montana said that in December patients with heart-attacks would come across the border from Canada. There's a saying on the Native American reservations in South Dakota, "Don't get sick after June," (Indian Health funding re-ups in August-September).
- The entire health insurance industry has a vested interest in opposing universal health care, and would go unemployed if it were implemented.
- Medical technology often takes an extremely low priority (which may not be all bad, considering the current racket)
Philosophical
- Universal health care forces an enormous purchasing decision upon people who may not share the same values. ie I may not want an expensive health insurance policy, yet the government forces me to give up thousands of dollars annually in taxes to have one.
- Universal health care is tantamount to endorsing irresponsible decisions in certain situations. ie If my neighbor's smoking addiction leads to lung cancer, the government will just give him a new set of lungs and set him back on his way to light up another pack... and stick me and the rest of the neighborhood with the bill for the lung transplant.
- Universal health care is likely to be funded by a percentage of income (unlike health insurance premiums which are the same for everyone in a specific underwriting category), which means that rich people are forced to pay more than poor people, for the same service. The price discrimination alone is unjust, but it's even worse in my mind to think that the government is forcing rich people to pay for poor people's hospital bills. Now just to make sure I'm not misunderstood on this point, I will stand up and cheer for anyone who voluntarily pays for a needy person's care. But I do not think that the government has any right to force such charity upon its citizens. Charity always must be done either individually or through private churches, service organizations, etc. The government's obligation is to ensure justice for all people, not play Robin Hood and rob people of legitimately earned income.
Personally, it's the philosophical objections that discourage me more than the practical ones. Rumor has it that I'm an unusually ideological individual... but for whatever reason, the stories of people dying to get across the border don't rile me up as much as the idea that Uncle Sam is going to make me buy health insurance against my will and pay for people who refuse to take care of themselves. Anyway, I included good reasons for people of both types to hesitate voting for universal health care.
However, I should mention that if were it the only possible solution, I think that I would vote for it over keeping the status quo. Yet, I'm not convinced it's the ideal solution.
4) Medical price regulations.
So in light of part 3, I asked myself what precisely is it about universal health care that solves the problem? When you think about it, universal health care is actually 2 concepts rolled together. First, the government insists that doctors will receive a specific reimbursements for each procedure, and not a penny more. And second, the government takes on the role of the health insurance company... collecting money up front and distributing it throughout the year as claims come in.
After separating the two concepts, I discovered that all of the practical and philosophical problems listed in (3) come from the latter. If government were to merely regulate the prices, health care would be affordable... both directly or through health insurance premiums. When my friend Cory lays out his case for universal health care, he likes to remind me that the founder of capitalism ideology, Adam Smith, believed that government has an obligation to help in economics in places where the free market fails. I agree. But government's intervention doesn't need to be an all-out co-option of the health insurance industry... it could be as simple as establishing a fee schedule that hospitals (and pharmaceutical companies?) have to abide by.
The last time I encountered Adam Smith's quote on government intervention was in my econ class under the chapter of utilities... and how electricity and water are kept at a stable affordable price by government regulation. I don't see any reason why the solution for electricity and water couldn't be the solution for health care.
This avoids all the issues in part 3, especially important in my mind, the philosophical ones. We keep essentially the same system in tact: everyone is free to choose whether they would like to take health insurance or not, a smoker takes responsibility for his own smoking-related illnesses (or pay the health insurance premium for the "smoking" underwriting category), and government doesn't rob from the rich to give to the poor. It doesn't seem to be a great stretch of the imagination, either, to consider health care basically as a utility. I don't think that people have a right to health care, per se... that everyone should get free care on each cough, sneeze, and self-inflicted injury. (Nor should they get free electricity.) But I could be persuaded to believe that people have a right to affordable health care, like they have a right to an afforable education, water, etc.
Something has to be done about health care and this seems like the most sensible solution. Please give me feedback if you think that my logic is awry.
