Making Sense Of Health Care

Posted by on Sep 16, 2009 in Leadership | One Comment

For the last few months the Obama administration has been making a pretty big deal out of health care, and I figured it was time for me to have at least a basic understanding of what’s going on. So, I’ve been doing my research, trying to navigate the mired mass of nonsense that is “the health care debate.” I’ve read a lot, watched far too much news, wasted my life on commentary shows… you name it, I’ve been doing it.

Turns out, nobody has a bloody clue what’s going on.

Finally, thanks to my friend Nate, I got hold of an article that finally shed some light on the systemic problems I’ve sensed, but never knew enough about to articulate. The author is a man by the name of David Goldhill, who, sadly, had to watch his father deteriorate in a dreary hospital for many weeks before finally dying in order to get the insider knowledge it took to catalyze this insightful piece.

To date, it’s literally the only thing that has made any sense to me, and I wanted to do my small part to spread the word.

You can find the original article here: http://www.theatlantic.com/doc/print/200909/health-care. If you’d like to download a PDF version, click here. I know many of you may not feel like you have time to read a twenty page article, so I tried to create an abridged version below as well (page numbers correspond to the PDF).

Thanks for your great work, David! Here’s hoping we can actually see something resembling your ideas become a reality.

INSURANCE IS A BIG PART OF THE PROBLEM (p. 5-6)

How often have you heard a politician say that millions of Americans “have no health care,” when he or she meant they have no health insurance? How has a method of financing health care become synonymous with care itself?

The reason for financing at least some of our health care with an insurance system is obvious. We all worry that a serious illness or an accident might one day require urgent, extensive care, imposing an extreme financial burden on us. In this sense, health-care insurance is just like all other forms of insurance—life, property, liability—where the many who face a risk share the cost incurred by the few who actually suffer a loss.

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.

The use of insurance to fund virtually all care is itself a major cause of health care’s high expense.

Insurance is probably the most complex, costly, and distortional method of financing any activity; that’s why it is otherwise used to fund only rare, unexpected, and large costs. Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?

THE EFFECT OF MORAL HAZARD (p. 6-7)

“Moral hazard” is the tendency we all have to change our behavior, becoming spendthrifts and otherwise taking less care with our decisions, when someone else is covering the costs.

Every time you walk into a doctor’s office, it’s implicit that someone else will be paying most or all of your bill; for most of us, that means we give less attention to prices for medical services than we do to prices for anything else. Most physicians, meanwhile, benefit financially from ordering diagnostic tests, doing procedures, and scheduling follow-up appointments. Combine these two features of the system with a third—the informational advantage that extensive training has given physicians over their patients, and the authority that advantage confers—and you have a system where physicians can, to some extent, generate demand at will.

For almost all our health-care needs, the current system allows us as consumers to ask providers, “What’s my share?” instead of “How much does this cost?”—a question we ask before buying any other good or service. And the subtle difference between those two questions is costing us all a fortune.

THE GOV’T IS NOT GOOD AT COST REDUCTION (p. 8)

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.

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.

A RIDICULOUS LACK OF COMPETITION (p. 10)

The net effect of the endless layers of health-care regulation is to stifle competition in the classic economic sense. What we have instead is a noncompetitive system where services and reimbursement are negotiated above consumers’ heads by large private and government institutions. And the primary goal of any large noncompetitive institution is not cost control or product innovation or customer service: it’s maintenance of the status quo.

THE GOVERNMENT LOVES HOSPITALS (p.10)

Many hospitals still exist in their current form largely because they are protected by regulation and favored by government payment policies, which effectively maintain the existing industrial structure, rather than encouraging innovation.

Hospitals are indeed required to provide emergency care to any walk-in patient, and this obligation is a meaningful public service. But how do we know whether the charitable benefit from this requirement justifies the social cost of expensive hospital care and poor quality? We don’t know. Our system of health-care law and regulation has so distorted the functioning of the market that it’s impossible to measure the social costs and benefits of maintaining hospitals’ prominence. And again, the distortions caused by a reluctance to pay directly for health care—in this case, emergency medicine for the poor—are in large part to blame.

YOU ARE NOT THE CUSTOMER (p. 12)

In case you wonder who a care provider’s real customer is, try reading one of these [hospital] bills. [Or] try discussing prices with hospitals and other providers. Eight years ago, my wife needed an MRI, but we did not have health insurance. I called up several area hospitals, clinics, and doctors’ offices—all within about a one-mile radius—to find the best price. I was surprised to discover that prices quoted, for an identical service, varied widely, and that the lowest price was $1,200. But what was truly astonishing was that several providers refused to quote any price. Only if I came in and actually ordered the MRI could we discuss price.

Keeping prices opaque is one way medical institutions seek to avoid competition and thereby keep prices up. And they get away with it in part because so few consumers pay directly for their own care—insurers, Medicare, and Medicaid are basically the whole game. But without transparency on prices—and the related data on measurable outcomes—efforts to give the consumer more control over health care have failed, and always will.

TECHNOLOGY IS GETTING MORE EXPENSIVE!? (p. 13)

One of the most widely held pieces of conventional wisdom about health care is that new technology is relentlessly driving up costs. Yet over the past 20 years, I’ve bought several generations of microwave ovens, personal computers, DVD players, GPS devices, mobile phones, and flat-screen TVs. I bank mostly at ATMs, check out my own goods at self-serve supermarket scanners, and attend company meetings by videoconference. Technology has transformed much of our daily lives, in almost all cases by adding quantity, speed, and quality while lowering costs. So why is health care different?

Well, for the most part, it isn’t. Whether it’s new drugs to control previously untreatable conditions, diagnostic equipment that enhances physician productivity, or minimally invasive techniques that speed patient recovery, technology-driven innovation has been transforming care at least as greatly as it has transformed the rest of our lives.
But most health-care technologies don’t exist in the same world as other technologies.

Recall the MRI my wife needed a few years ago: $1,200 for 20 minutes’ use of a then 20-year-old technology, requiring a little electricity and a little labor from a single technician and a radiologist. Why was the price so high? 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).

“COMPREHENSIVE” REFORM (p. 14-15)

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.

SOLUTIONS
I wanted to include some of his suggestions for solutions, but found it difficult to create a fair “short” version, as they seem drastic without proper explanation. I’d encourage you to check them out on pages 16-17.

As always, your thoughts below…

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If you liked that post, then try these…

You Are Destined To Color Inside The Lines (So Draw Better Lines) by Josh Allan Dykstra on November 14th, 2011

What Makes Apple Work by Josh Allan Dykstra on July 9th, 2012

The Good Simple by Josh Allan Dykstra on February 8th, 2010

1 Comment

  1. benjamin morrison
    September 30, 2009

    a topic i’ve been ranting about for a long time. :) i’ll download and read the full article. very interesting thoughts so far.

    Reply

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