Thursday, July 30, 2009

A Great Summary Of Healthcare

I had an extended conversation with a friend of mine about the current healthcare debate. He seemed to believe that healthcare was too important to think about economics or profit motives. I think economics is in everything, and healthcare is too important to try to ignore economics, because if you do, the whole thing will mess up. Unfortunately, I wasn't very good at articulating my point to him. Luckily, I found a great blog post explaining the economics of the thing in terms anyone can understand.

From Planet Utah:

The last time we had a serious debate about U.S. health care was 1993. At that time, the GOP took a "just say no" approach and prevailed.

This time, though, I see and hear prominent Republicans embracing universal coverage as an important element of any major reform. That's a big change, and a welcome one as far as I'm concerned. I welcome it not just because I'd like to see the U.S. have universal coverage, but because if conservatives/Republicans excuse themselves from this discussion, we're more likely to get some version of Kennedycare than a more sensible reform.

Footnote: If anyone told you that we were going to make sure everyone in America had a house of their own, and at the same time that we were going to control the growth of housing prices, you would say, "Cool. And when you're done, can you send a fat-free pizza and an invisible chocolate unicorn to my affordable new house?"

It just doesn't make sense that you can dramatically increase the demand for something and not expect the price of that something to go up. That's why you are correct to be skeptical about the Obama administration's claims that it will achieve universal health care coverage while at the same time keeping costs in check.

The Obama people would undoubtedly tell you, "But there are all sorts of steps we can take to hold the line on prices: making medical records electronic, emphasizing preventive care, researching and disseminating knowledge on the most effective treatments..." Truth is, though, no one knows whether, or to what extent, these things will work to restrain prices. But you gotta say something about how you're going to restrain prices, and it looks like this is the something the Obama administration is going to say.

And if it doesn't work? Well, that's someone else's problem. Obama still gets credit for bringing us universal health care. (Analogy: George W. Bush gets credit for knocking off the Taliban in Afghanistan; Barack Obama has to deal with the very messy aftermath.)

Anklenote: But if the government is such a big player in healthcare--and poised to get even bigger--can't it dictate prices?

Sure, and it already does that to a certain extent. It pays a lot less for services provided under Medicare, for example, than private insurers pay for those same services.

But government can't suspend the laws of physics, or economics. If you squeeze a balloon on one end, the other end gets fatter. And if you constrain payments in a massive public program like Medicare, doctors, hospitals, and other providers simply raise them elsewhere--most notably, in the fees they charge to insurers and (especially) the uninsured.

Shin-note: Okay, well, if that's the problem, then what if there were no private insurers, because government decided to pay all the bills, and what if there were no uninsured, because as the one paying all the bills, government decided to pay the bills for the previously uninsured, too? Wouldn't that solve the problem of cost-shifting?

Sure, that's what single-payer systems are all about. Government is the only game in town as far as paying for services, so when government sets a price, that's the price that gets paid. Problem solved, right?

Not so fast. When government starts setting prices--and, inevitably, setting them substantially lower than the market would set them, just because it can--you have a lot of smart, ambitious, disciplined people who otherwise would have gone into medicine saying, "You know, that's not nearly as attractive a career as it used to be. I think I'll be a shrimp boat captain instead." And you have a lot of entrepreneurial individuals and companies who otherwise would have operated hospitals and other treatment centers saying, "You know, that's not nearly as attractive a business as it used to be. I think I'll start an ostrich ranch instead." And then you start getting serious shortages of medical goods and services. You also get a decline in the quality of those goods and services, as the people providing them are not as smart, ambitious, or disciplined as the people that used to provide them.

Knee-note: Okay, well, if that's the problem, then why not just have government set prices at a level high enough not to create these disincentives? Won't that solve the problem?

Yes, but only in theory. As you might imagine, running things this way is HUGELY expensive. I mean, you're talking about taking all of the medical bills being paid today by individuals and insurers, and all of the medical fees that providers don't charge in the first place or never collect, and giving government an invoice for ALL of it.

It's a gigantic bill. Government won't want to pay it, and won't be able to without massive borrowing, massive tax increases, or massive spending cuts.

When confronted with options like this, politicians typically choose "none of the above." Specifically, they pick a number--let's say it's 65% of the total bill--and say, "This is how much we can afford to pay. Take it or leave it."

Providers will take it, but they'll also say, "If you're only going to pay 65% of the bill, we're only going to provide 65% of the service."

In practical terms, this means that if 100 people need a kidney transplant, only 65 people are going to get their kidney. Call that what you want, but most people call it health care rationing. It's a fact of life, and death, under single-payer systems. It's the reason you hear about Canadians crossing the border into the U.S. to get health care. It may be crazy-expensive here, but at least you can get it...

Punch-line: To paraphrase C. Everett Koop for about the millionth time in my blogging life, "We all agree that we want first-rate health care, universal coverage, and cost containment. Well, we can't have all three. So, let's pick two and make the best of it."

Again, though, politicians hate having to make choices like that, so they usually convince themselves that they don't have to.

I think that clears up a lot of things.

PS - Interesting fact - Utah recently achieved a bipartisan healthcare reform that most agree is a pretty monumental achievement.


  1. Let me speak on this as someone who is on the front lines (as a physician). The problem is that health care in the U.S. is run like a free market with lots of obtuse rules and statutes that the average patient doesn't have the foggiest clue about.

    For example, let's say you break your finger, and need to have it examined, x rayed, and reduced (popped back into place). A true free market would dictate that you would go to the health care provider of your choosing and pay them a fair fee (set by the market of course) for the service.

    Instead you go to the hospital and one of several scenarios takes place:
    1. You have insurance. You pay $25 (your co-pay) for the service. The hospital is re-imbursed whatever their contracted rate with your insurance company is (let's say $400). The staff time, doctor's time, clinical expertise, risk of malpractice, etc, was worth what to you? 25 bucks, because that's what it cost you.

    2. You don't have insurance. You pay cash for your treatment. Because you don't have the clout that the big insurance companies do you pay WAY over the going rate for the services (let's say $2500). Why on earth would they charge you this when they are willing to take only $500 for the same service from an insurance company?

    Here's the reason....
    Wait for it....
    Wait for it...

    Because the government says they have to!
    This varies state by state, but there are laws in most states prohibiting what are known as "dual fee schedules". This is to prevent the doctor from charging one price to the insurance company and then turning around and giving a cash paying patient a cheaper rate. The sad irony is that a large hospital probably has 30 different insurance contracts with reimbursements that are all over the board. So we not only have a "dual fee schedule" already, we have several dozen fee schedules!

    Well insurance companies being the adminstrative, lawyer heavy machines that they are, they find a way to automatically slash every bill. This is why the "going rate" for services is so high. Physicians know they will get hosed by the insurance company, so they have to inflate the services so they are still making a decent living after the "hosing".

    Guess what the patient without insurance is paying- the drastically inflated prices.

    What's the solution? Gee, if only it were that easy.

    I think transparency in health care pricing is a good first step. Jay Parkinson M.D. (his blog is a good read) did a survey of what facilities in a 10 mile radius of his office would charge for a chest x ray and found prices varied by hundreds of dollars within the same area! If patients knew this they could at least make educated decisions and decide if they want the "cheap doctor" or the "expensive doctor" just like they can decide if they want to drive a Kia or a Mercedes.

    Defensive medicine is another big problem. TONS of unnecessary testing is done simply to cover our butts. This may be the only time you'll hear me say this, but if we moved to a system of torts similar to the.....gasp....French, we would all be a lot better off. The French system of litigation is a "loser pays" system, i.e. if I sue you and I lose, I pay your court costs as well as my own. This would prevent a lot of frivolous malpractice suits where it's really a matter of a patient who is ticked off at a doctor or upset about an adverse outcome.

    Finally, we may have to rethink the economic incentive of the medical profession. Your post mentioned that medicine will no longer attract the best and brightest if fees are cut, and this is true. It's already happening (the best and brightest ended up on Wall Street- look where that got us!). If we want our doctors to be the best, we have to reward them as such, or the ones who are motivated primarily by money (not a love of helping people, human compassion, etc) will go to Wall Street, or Silicon Valley, or Bejing, or where ever the next big opportunity is.

  2. Here's the rest of the post (blogspot is not built for long winded rants)

    I think we would all be amazed at how little healthcare would cost (in many cases) and how happy doctors and patients would be if we simply went back to a system where the doctor performs a service and the patient pays a fair fee for that service. This is in effect all over the country at so called "Urgent Care Centers" like Solantic where you literally choose which service you want and know up front what it costs.

    That's my 2 cents, and easily the longest blog reply I've ever written.

  3. Yeah, the market for healthcare is so terribly distorted it's almost beyond recognition of a normal market. I recently had to do some policy research on the issue and it literally gave me a headache just thinking about it. This just reinforces my respect for the people who dedicate all of their time trying to sort the problem out.