America is engaged in a vigorous debate over reforming our healthcare system. That debate has been politicized and dominated by sound bite arguments to the point that no one seems to be thinking clearly about it.
Certainly there is significant opportunity to improve the system. The delivery of health care has become costly and some in our society have inadequate access to care. In this article I seek to address some of the issues and inefficiencies that are critical that would promise to improve the complex economics, access means and quality of care.
Firstly, we should recognize that the huge majority of Americans are relatively happy with the medical care that they get under the current system. Let’s not fix the part of the system that is not broken. This very large majority, particularly seniors, are terrified about changes that might deny them the medical benefits that they now receive. Although it is a costly, bureaucratic and inefficient delivery system; much can be done to improve it.
More government involvement in people’s healthcare is a bad idea. Virtually everything the government runs operates badly and is much more costly to operate than comparable activities in the private sector. Think about the Post Office. Think about the bureaucratic operation of Medicare and the fact that it is “going broke.” Furthermore, do we really want to embark on a path that involves more public service workers in our personal medical decisions?
Myths & Misconceptions
Advocates of healthcare reform often point to statistics such as life expectancy where the US lags many other countries. They argue that, for all that we spend, our system does not deliver better results. Nothing could be further from the truth. Many factors, other than the quality of medical care, drive mortality statistics. Iceland has the highest male life expectancy of any nation, yet they have virtually no deaths from auto accidents, their young men never go to war and cardiovascular disease is very low due to their diet that is dominated by fish. Japan has the best life expectancy statistics for a large nation, but again for reasons that are obvious: a diet rich in fish, a very low crime rate, an absence of military deaths and a population where obesity is, by far, the lowest in the developed world. Poor infant mortality rates for the US are also sometimes quoted as a critique of our healthcare system. The infant mortality problem is largely a result of socioeconomic factors and access to prenatal care by the poor. On this matter, we can do better.
A better test is survivability of patients that enter the health care system and the quality of outcomes for those that receive treatment. On that front Americans do well. Outcomes for patients with cancer, heart disease, diabetes, orthopedic degeneration and other maladies are very good in the US. The rest of the world knows it and individuals, that have the means to be treated anywhere, overwhelmingly choose medical centers in America.
Health Care Economics 101
Our political leaders are promising that the huge expansion on health care coverage to 40-50 million more people will not increase the deficit. This is a naïve and dangerous proposition. Washington claims that they can pay for it through savings from a reduction in “waste and abuse”. Our government does not have a competency in such undertakings and tends, instead, to add on more bureaucracy and waste. If we, as a society, wish to add this entitlement on top of Social Security, Medicare, Welfare and other such social programs, we must realistically be prepared to pay for it. Our elected officials are good at giving away “other people’s money” (taxpayers). According to the impartial Congressional Budget Office, the ambitious expansion of healthcare coverage being proposed will add significantly to the already huge federal deficit. Unfortunately, the burden of paying for this will fall on young people for decades to come.
Our leaders in Washington are also promoting a “public option” as a way to expand coverage and create a competitor for private sector insurance companies. Their proposition is that competition from the lower cost public healthcare insurance option would bring down the cost of private sector premiums. Here again the logic is flawed. Medicare, the biggest government healthcare benefit program pays only about 78% of hospital’s average costs. In order to remain financially viable, hospitals must charge more to private insurance providers. In other words, the private insurers (and their insured population of consumers) subsidize the care of the elderly on Medicare. If another low paying public program is launched, hospitals, doctors and other providers with need to raise their prices to private insurers in order to make ends meet.
There are some things, however that can be done.
Administrative Inefficiencies
The paperwork cycle in healthcare is an extremely inefficient process. Innovations can be made that improve the efficiency and quality of care and also the payment processing system. Why is it that we need to fill out the same forms and produce insurance information every time we go to a new doctor or hospital? In a more efficient system, each person could maintain their medical history on a private online site that is password protected and patient controlled. With each visit to a doctor, hospital, diagnostic lab, imaging center or change in insurance coverage, new information could be added to the site which would be available when needed.
Preventative Health
Many, perhaps most, Americans lead an unhealthy lifestyle. This is exhibited mostly in their diet and exercise habits. The highest cost impact area lies simply in the area of obesity. Obesity leads to many costly diseases (cardiovascular, diabetes, cancer and others) that weigh on the economic equation of healthcare. The obesity problem in the US, and the economic burden that it places on our system, is huge. Americans lead the world in obesity at 32.2% while obesity in Japan is a mere 3%. Even in France, the frequency of obesity in their population is less than one third of the rate for the US. The frequency of obesity in America is significantly more than double that of Germany (think beer & Bratwurst). Economic implications: since 32.2% of Americans are obese and obese people cost 36% more than individuals of normal weight, the obese population in America are responsible for about 40% for the nation’s health care expenditures.
To deal with the obesity problem, there need to be strong economic incentives for behavioral change and a well-conceived public communications program like the campaign against cigarette smoking. On the economic front, healthcare insurance should reflect the higher cost of obese patients by charging higher premiums for individuals who are overweight. There could be other incentives such as airlines charging passengers by the pound. Higher sales taxes could be levied on junk food and beverages with high caloric and fat content. As hefty cigarette taxes dissuaded smokers, this could discourage excessive, unhealthy food consumption in the same way.
Needless to say, there are many other preventative medicine strategies that can reduce the cost of care (e.g. regular check ups that provide early detection of the onset of disease and the pre-emptive treatments that are available).
Over Utilization:
Many factors contribute to the over utilization of healthcare facilities and services. Primary among these is the fact that healthcare is paid for by a third party (government or insurance). Thus, consumers are incentivized to overuse the system. They do not need to make a “buy or not buy” decision like everything else in life (a car, house, food, vacation, etc.). The method of payment should be overhauled to provide a first-dollar participation in the cost of every healthcare service. Consumers would then think about whether or not to use the system on each occasion, weighing the merits and costs. Some economists also believe that the tax benefits applied to healthcare insurance may also lead indirectly to over utilization of the system.
The same faulty incentive exists with healthcare providers. The payment system is mostly one based on units of service. Thus, providers (doctors, hospitals, labs, etc.) get paid more for each unit of service provided. Higher utilization of the system generates more revenue for the provider. This system needs to be overhauled to pay for good outcomes. Certainly, the threat of medical malpractice liability, in our litigious society, leads to the practice of defensive medicine…which is costly and does not necessarily lead to quality care.
Insurance:
For some reason that few can explain, health care insurers are restricted from offering plans across state lines. This severely restricts competition and is awkward since many employers have employees in multiple states. Rather than create a “public option” adding to the tax burden, we should simply eliminate the restriction on health care insurers and let the free market work.
Indigent Care:
Mostly, poor people are locked out of the formal healthcare system. However, most people in this category find a way to be treated for illnesses. Unpaid care is provided through emergency rooms and hospitals (mostly charity and public hospitals). However, this system is very inefficient and costly. A patient with the flu shows up at the same “doorstep” as an accident victim or an individual suffering a heart attack. The primary care provided to indigents from emergency rooms is very costly and interferes with the provision of care to those that need it.
This problem could be solved by creating a network of clinics that would provide free primary care to the poor, and triage those in need of complex intervention to appropriate medical centers that are equipped to care for those patients and compensated for it. The cost relief of the burden on emergency rooms would help offset the costs of these clinics and it would be far more efficient than setting up a new Medicare-like system for the uninsured.
Tort Reform:
Heavy political contributions by trial lawyers make legislation in the area of tort reform nearly impossible. Certainly, when there is malpractice, the system should be able to make well-informed and effective judgments and then provide appropriate penalties and awards. The problem is that the defenders of the status quo appeal to public sympathy by raising examples of persons that suffered due to medical malpractice without recognizing the abuses of the system. Unfortunately, all-to-often frivolous lawsuits claiming malpractice are simply opportunistic grabs for money. Insurance companies facing significant legal costs and the possibility of a large award following a jury trial are quick to settle, even when the case is clearly without merit. Awards often are excessive and drive malpractice insurance premiums higher to reflect this cost. This cost alone can be so high as to force many physicians out of the practice of medicine.
This is a complex issue since we would not like to deny a rightful claim, but also frivolous lawsuits and excessive awards need to be curtailed. It must be attacked from both directions: the compensation of trial attorneys and the excessive plaintiff awards. Excessive litigation also drives up costs by causing doctors to over prescribe tests and treatments in the practice of defensive medicine. No one knows how much this really costs, but it is likely to be a big number.
Access vs. Capacity:
A serious problem exists in the capacity of our healthcare system to deliver more care. If we expand coverage to a large new population, and if the number of doctors or hospital beds remains static, the overall quality of care and access to care for everyone will go down. Any expansion of “access” must be accompanied by an expansion of the “capacity” of the system.
Increasingly we find ourselves in a time when fewer talented young people are motivated to pursue careers in the profession of medicine. Also, doctors are retiring early from the practice because of the administrative burden, increased malpractice insurance costs, and lower payment/reimbursement for their services. There is a particularly short supply of general practitioners which perform a vital function in the healthcare system. They provide primary care and are the “gate keepers” that triage patients to the specialty care treatment providers. A high payoff solution to this would be to offer low-interest, forgivable loans to medical students who agree to serve as primary care physicians in rural areas or urban clinics that provide care for indigent populations. They could “work off” their debt obligations through such community service.
Preserving Innovation:
The great engine of innovation in medicine that is contributing measurably to the quality of care is facing a threat by public policy leaders that do not understand the economics equation of innovation.
Nowhere is this more obvious than in the debate about reducing the number of years of proprietary protection under US patent laws for new drugs. Also, there is continued pressure on the pricing of these new drugs. New drugs are extremely expensive and risky to develop. During long safety and efficiency trials many fail to deliver the anticipated results and get FDA approval. There must be an attractive incentive to invest in these and other medical innovations.
Basic Principles:
When we examine the means to improve the healthcare system in America and make it more cost effective, the basic principles mostly relate to realigning the incentive system and removing bureaucracy. At the top of the list is to motivate and empower the consumer (patient) to make intelligent decisions on the use of the healthcare system. Consumers should pay a percentage of the cost, starting at dollar one. They should be incentivized to decide: whether or not to use it, how much to spend and to shop for the best value for the best price. Remove the incentive for doctors to practice defensive medicine and reward them for the achievement of desirable outcomes (instead of simply providing units of service). We must provide incentives for people to pursue healthy lifestyles. Also, we must promote innovation that leads to breakthroughs in medicine; incentives for entrepreneurs, companies, and healthcare providers that develop diagnostic methods, pharmaceuticals, therapeutic means and healthcare delivery modalities that improve medical outcomes, reduce costs and improve the efficiency of the healthcare delivery system. Also, we certainly need to increase competition in the healthcare insurance industry by eliminating the restrictions on doing business across state lines. In all of this, we need to simplify the payment and information handling system and the immense bureaucracy that burdens the process of our healthcare delivery system.
Certainly there is significant opportunity to improve the system. The delivery of health care has become costly and some in our society have inadequate access to care. In this article I seek to address some of the issues and inefficiencies that are critical that would promise to improve the complex economics, access means and quality of care.
Firstly, we should recognize that the huge majority of Americans are relatively happy with the medical care that they get under the current system. Let’s not fix the part of the system that is not broken. This very large majority, particularly seniors, are terrified about changes that might deny them the medical benefits that they now receive. Although it is a costly, bureaucratic and inefficient delivery system; much can be done to improve it.
More government involvement in people’s healthcare is a bad idea. Virtually everything the government runs operates badly and is much more costly to operate than comparable activities in the private sector. Think about the Post Office. Think about the bureaucratic operation of Medicare and the fact that it is “going broke.” Furthermore, do we really want to embark on a path that involves more public service workers in our personal medical decisions?
Myths & Misconceptions
Advocates of healthcare reform often point to statistics such as life expectancy where the US lags many other countries. They argue that, for all that we spend, our system does not deliver better results. Nothing could be further from the truth. Many factors, other than the quality of medical care, drive mortality statistics. Iceland has the highest male life expectancy of any nation, yet they have virtually no deaths from auto accidents, their young men never go to war and cardiovascular disease is very low due to their diet that is dominated by fish. Japan has the best life expectancy statistics for a large nation, but again for reasons that are obvious: a diet rich in fish, a very low crime rate, an absence of military deaths and a population where obesity is, by far, the lowest in the developed world. Poor infant mortality rates for the US are also sometimes quoted as a critique of our healthcare system. The infant mortality problem is largely a result of socioeconomic factors and access to prenatal care by the poor. On this matter, we can do better.
A better test is survivability of patients that enter the health care system and the quality of outcomes for those that receive treatment. On that front Americans do well. Outcomes for patients with cancer, heart disease, diabetes, orthopedic degeneration and other maladies are very good in the US. The rest of the world knows it and individuals, that have the means to be treated anywhere, overwhelmingly choose medical centers in America.
Health Care Economics 101
Our political leaders are promising that the huge expansion on health care coverage to 40-50 million more people will not increase the deficit. This is a naïve and dangerous proposition. Washington claims that they can pay for it through savings from a reduction in “waste and abuse”. Our government does not have a competency in such undertakings and tends, instead, to add on more bureaucracy and waste. If we, as a society, wish to add this entitlement on top of Social Security, Medicare, Welfare and other such social programs, we must realistically be prepared to pay for it. Our elected officials are good at giving away “other people’s money” (taxpayers). According to the impartial Congressional Budget Office, the ambitious expansion of healthcare coverage being proposed will add significantly to the already huge federal deficit. Unfortunately, the burden of paying for this will fall on young people for decades to come.
Our leaders in Washington are also promoting a “public option” as a way to expand coverage and create a competitor for private sector insurance companies. Their proposition is that competition from the lower cost public healthcare insurance option would bring down the cost of private sector premiums. Here again the logic is flawed. Medicare, the biggest government healthcare benefit program pays only about 78% of hospital’s average costs. In order to remain financially viable, hospitals must charge more to private insurance providers. In other words, the private insurers (and their insured population of consumers) subsidize the care of the elderly on Medicare. If another low paying public program is launched, hospitals, doctors and other providers with need to raise their prices to private insurers in order to make ends meet.
There are some things, however that can be done.
Administrative Inefficiencies
The paperwork cycle in healthcare is an extremely inefficient process. Innovations can be made that improve the efficiency and quality of care and also the payment processing system. Why is it that we need to fill out the same forms and produce insurance information every time we go to a new doctor or hospital? In a more efficient system, each person could maintain their medical history on a private online site that is password protected and patient controlled. With each visit to a doctor, hospital, diagnostic lab, imaging center or change in insurance coverage, new information could be added to the site which would be available when needed.
Preventative Health
Many, perhaps most, Americans lead an unhealthy lifestyle. This is exhibited mostly in their diet and exercise habits. The highest cost impact area lies simply in the area of obesity. Obesity leads to many costly diseases (cardiovascular, diabetes, cancer and others) that weigh on the economic equation of healthcare. The obesity problem in the US, and the economic burden that it places on our system, is huge. Americans lead the world in obesity at 32.2% while obesity in Japan is a mere 3%. Even in France, the frequency of obesity in their population is less than one third of the rate for the US. The frequency of obesity in America is significantly more than double that of Germany (think beer & Bratwurst). Economic implications: since 32.2% of Americans are obese and obese people cost 36% more than individuals of normal weight, the obese population in America are responsible for about 40% for the nation’s health care expenditures.
To deal with the obesity problem, there need to be strong economic incentives for behavioral change and a well-conceived public communications program like the campaign against cigarette smoking. On the economic front, healthcare insurance should reflect the higher cost of obese patients by charging higher premiums for individuals who are overweight. There could be other incentives such as airlines charging passengers by the pound. Higher sales taxes could be levied on junk food and beverages with high caloric and fat content. As hefty cigarette taxes dissuaded smokers, this could discourage excessive, unhealthy food consumption in the same way.
Needless to say, there are many other preventative medicine strategies that can reduce the cost of care (e.g. regular check ups that provide early detection of the onset of disease and the pre-emptive treatments that are available).
Over Utilization:
Many factors contribute to the over utilization of healthcare facilities and services. Primary among these is the fact that healthcare is paid for by a third party (government or insurance). Thus, consumers are incentivized to overuse the system. They do not need to make a “buy or not buy” decision like everything else in life (a car, house, food, vacation, etc.). The method of payment should be overhauled to provide a first-dollar participation in the cost of every healthcare service. Consumers would then think about whether or not to use the system on each occasion, weighing the merits and costs. Some economists also believe that the tax benefits applied to healthcare insurance may also lead indirectly to over utilization of the system.
The same faulty incentive exists with healthcare providers. The payment system is mostly one based on units of service. Thus, providers (doctors, hospitals, labs, etc.) get paid more for each unit of service provided. Higher utilization of the system generates more revenue for the provider. This system needs to be overhauled to pay for good outcomes. Certainly, the threat of medical malpractice liability, in our litigious society, leads to the practice of defensive medicine…which is costly and does not necessarily lead to quality care.
Insurance:
For some reason that few can explain, health care insurers are restricted from offering plans across state lines. This severely restricts competition and is awkward since many employers have employees in multiple states. Rather than create a “public option” adding to the tax burden, we should simply eliminate the restriction on health care insurers and let the free market work.
Indigent Care:
Mostly, poor people are locked out of the formal healthcare system. However, most people in this category find a way to be treated for illnesses. Unpaid care is provided through emergency rooms and hospitals (mostly charity and public hospitals). However, this system is very inefficient and costly. A patient with the flu shows up at the same “doorstep” as an accident victim or an individual suffering a heart attack. The primary care provided to indigents from emergency rooms is very costly and interferes with the provision of care to those that need it.
This problem could be solved by creating a network of clinics that would provide free primary care to the poor, and triage those in need of complex intervention to appropriate medical centers that are equipped to care for those patients and compensated for it. The cost relief of the burden on emergency rooms would help offset the costs of these clinics and it would be far more efficient than setting up a new Medicare-like system for the uninsured.
Tort Reform:
Heavy political contributions by trial lawyers make legislation in the area of tort reform nearly impossible. Certainly, when there is malpractice, the system should be able to make well-informed and effective judgments and then provide appropriate penalties and awards. The problem is that the defenders of the status quo appeal to public sympathy by raising examples of persons that suffered due to medical malpractice without recognizing the abuses of the system. Unfortunately, all-to-often frivolous lawsuits claiming malpractice are simply opportunistic grabs for money. Insurance companies facing significant legal costs and the possibility of a large award following a jury trial are quick to settle, even when the case is clearly without merit. Awards often are excessive and drive malpractice insurance premiums higher to reflect this cost. This cost alone can be so high as to force many physicians out of the practice of medicine.
This is a complex issue since we would not like to deny a rightful claim, but also frivolous lawsuits and excessive awards need to be curtailed. It must be attacked from both directions: the compensation of trial attorneys and the excessive plaintiff awards. Excessive litigation also drives up costs by causing doctors to over prescribe tests and treatments in the practice of defensive medicine. No one knows how much this really costs, but it is likely to be a big number.
Access vs. Capacity:
A serious problem exists in the capacity of our healthcare system to deliver more care. If we expand coverage to a large new population, and if the number of doctors or hospital beds remains static, the overall quality of care and access to care for everyone will go down. Any expansion of “access” must be accompanied by an expansion of the “capacity” of the system.
Increasingly we find ourselves in a time when fewer talented young people are motivated to pursue careers in the profession of medicine. Also, doctors are retiring early from the practice because of the administrative burden, increased malpractice insurance costs, and lower payment/reimbursement for their services. There is a particularly short supply of general practitioners which perform a vital function in the healthcare system. They provide primary care and are the “gate keepers” that triage patients to the specialty care treatment providers. A high payoff solution to this would be to offer low-interest, forgivable loans to medical students who agree to serve as primary care physicians in rural areas or urban clinics that provide care for indigent populations. They could “work off” their debt obligations through such community service.
Preserving Innovation:
The great engine of innovation in medicine that is contributing measurably to the quality of care is facing a threat by public policy leaders that do not understand the economics equation of innovation.
Nowhere is this more obvious than in the debate about reducing the number of years of proprietary protection under US patent laws for new drugs. Also, there is continued pressure on the pricing of these new drugs. New drugs are extremely expensive and risky to develop. During long safety and efficiency trials many fail to deliver the anticipated results and get FDA approval. There must be an attractive incentive to invest in these and other medical innovations.
Basic Principles:
When we examine the means to improve the healthcare system in America and make it more cost effective, the basic principles mostly relate to realigning the incentive system and removing bureaucracy. At the top of the list is to motivate and empower the consumer (patient) to make intelligent decisions on the use of the healthcare system. Consumers should pay a percentage of the cost, starting at dollar one. They should be incentivized to decide: whether or not to use it, how much to spend and to shop for the best value for the best price. Remove the incentive for doctors to practice defensive medicine and reward them for the achievement of desirable outcomes (instead of simply providing units of service). We must provide incentives for people to pursue healthy lifestyles. Also, we must promote innovation that leads to breakthroughs in medicine; incentives for entrepreneurs, companies, and healthcare providers that develop diagnostic methods, pharmaceuticals, therapeutic means and healthcare delivery modalities that improve medical outcomes, reduce costs and improve the efficiency of the healthcare delivery system. Also, we certainly need to increase competition in the healthcare insurance industry by eliminating the restrictions on doing business across state lines. In all of this, we need to simplify the payment and information handling system and the immense bureaucracy that burdens the process of our healthcare delivery system.
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