Thursday, August 13, 2009

Atlantic article on health care

If this doesn't look customer friendly, there's a good reason...

The latest issue of The Atlantic has a very good article that should serve as an important contribution to the health care debate. Entitled "How American Health Care Killed My Father", the piece is written by David Goldhill, a self-described Democrat who, having lost his father to an infection contracted during a hospital stay, devoted himself to examining the many shortcomings of health care in this country. The conclusion of his research is that it's largely the result of a perverse set of incentives that stem from government regulations, tax policy and Medicare.

Like me, Goldhill argues than genuine reform efforts have to begin with a reduction in the role played by insurance, which has only ascended to its present position through ill-considered government policy:
There was nothing natural or inevitable about the way our system developed: employer-based, comprehensive insurance crowded out alternative methods of paying for health-care expenses only because of a poorly considered tax benefit passed half a century ago.

In designing Medicare and Medicaid in 1965, the government essentially adopted this comprehensive-insurance model for its own spending, and by the next year had enrolled nearly 12 percent of the population. And it is no coinci­dence that the great inflation in health-care costs began soon after. We all believe we need comprehensive health insurance because the cost of care—even routine care—appears too high to bear on our own. But 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?

Is this really a big problem for our health-care system? Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total. In 2006, it cost almost $500 per person just to administer health insurance. Much of this enormous cost would simply disappear if we paid routine and predictable health-care expenditures the way we pay for everything else—by ourselves.
Insurance plays such a distorting role because it virtually eliminates the need for cost consideration. People behave very differently when spending other people's money instead of their own:
The average insured American and the average uninsured American spend very similar amounts of their own money on health care each year—$654 and $583, respectively. But they spend wildly different amounts of other people’s money—$3,809 and $1,103, respectively...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.
A fortune quite literally. While most people probably think of health care insurance as a free benefit provided by employers, it's simply a part of the overall compensation package. If employers didn't provide this benefit it would free up money that could instead be given in salary and wages -- and the amount of money consumed by health care is considerable:
In 2007, employer-based health insurance cost, on average, more than $12,000 per family, up 78 percent since 2001. I’ve run several companies and company divisions of various sizes over the course of my career, so I can confidently tell you that raises (and even entry-level hiring) are tightly limited by rising health-care costs. You may think your employer is paying for your health care, but in fact your company’s share of the insurance premium comes out of your potential wage increase. Where else could it come from?

Let’s say you’re a 22-year-old single employee at my company today, starting out at a $30,000 annual salary. Let’s assume you’ll get married in six years, support two children for 20 years, retire at 65, and die at 80. Now let’s make a crazy assumption: insurance premiums, Medicare taxes and premiums, and out-of-pocket costs will grow no faster than your earnings—say, 3 percent a year. By the end of your working days, your annual salary will be up to $107,000. And over your lifetime, you and your employer together will have paid $1.77 million for your family’s health care. $1.77 million! And that’s only after assuming the taming of costs! In recent years, health-care costs have actually grown 2 to 3 percent faster than the economy. If that continues, your 22-year-old self is looking at an additional $2 million or so in expenses over your lifetime—roughly $4 million in total.
Insurance isn't the only force distorting the health care sector, with Goldhill also pointing to Medicare as another culprit:
...Although the population is rapidly aging, we have few geriatricians—physicians who address the cluster of common patient issues related to aging, often crossing traditional specialty lines. Why? Because under Medicare’s current reimbursement system (which generally pays more to physicians who do lots of tests and procedures), geriatricians typically don’t make much money. If seniors were the true customers, they would likely flock to geriatricians, bidding up their rates—and sending a useful signal to medical-school students. But Medicare is the real customer, and it pays more to specialists in established fields. And so, seniors often end up overusing specialists who are not focused on their specific health needs.
Then there's the small matter of its radically unsound financing:
As currently structured, Medicare is a Ponzi scheme. The Medicare tax rate has been raised seven times since its enactment, and almost certainly will need to be raised again in the next decade. The Medicare tax contributions and premiums that today’s beneficiaries have paid into the system don’t come close to fully funding their care, which today’s workers subsidize. The subsidy is getting larger even as it becomes more difficult to maintain: next year there will be 3.7 working people for each Medicare beneficiary; if you’re in your mid-40s today, there will be only 2.4 workers to subsidize your care when you hit retirement age.
And the regulations that come along with it, serving as a barrier to entry into the health care field that could help drive down costs:
Health care is an exceptionally heavily regulated industry. Health-insurance companies are regulated by states, which limits interstate competition. And many of the materials, machines, and even software programs used by health-care facilities must be licensed by state or federal authorities, or approved for use by Medicare; these requirements form large barriers to entry for both new facilities and new vendors that could equip and supply them.
One of the most significant points raised by Goldhill is that while insurance may seem like a great deal in that it takes you off the hook for payment, it also means that you aren't the real customer -- the insurance company or Medicare is. And health care providers react accordingly:
What amazed me most during five weeks in the ICU with my dad was the survival of paper and pen for medical instructions and histories. In that time, Dad was twice taken for surgical procedures intended for other patients (fortunately interrupted both times by our intervention). My dry cleaner uses a more elaborate system to track shirts than this hospital used to track treatment.

Not every hospital relies on paper-based orders and charts, but most still do. Why has adoption of clinical information technology been so slow? Companies invest in IT to reduce their costs, reduce mistakes (itself a form of cost-saving), and improve customer service. Better information technology would have improved my father’s experience in the ICU—and possibly his chances of survival.

But my father was not the customer; Medicare was. And although Medicare has experimented with new reimbursement approaches to drive better results, no centralized reimbursement system can be supple enough to address the many variables affecting the patient experience. Certainly, Medicare wasn’t paying for the quality of service during my dad’s hospital stay. And it wasn’t really paying for the quality of his care, either; indeed, because my dad got sepsis in the hospital, and had to spend weeks there before his death, the hospital was able to charge a lot more for his care than if it had successfully treated his pneumonia and sent him home in days.
This is only a small sampling of the article, which really should be read in its entirety and includes other discussions such as the role played by medical technology as a cost-driver. One can only conclude after reading it that true health care reform has to include an end to the central role of insurance, less regulation and an overhaul of Medicare. What's currently on the table is basically the opposite.


Anonymous said...

A friend recently had a CAT scan. The hospital where he had it done stated that the cost would be $5000. When my friend received a payment statement from his insurer, he saw that they had only paid $500. He called the hospital, wondering if he was responsible for the other $4500, and was told that the hospital accepted the $500 as full payment from the insurance company. Without insurance the fee would have been 10X greater! If the hospital could make a profit at $500, where does the $5000 fee come from?

Paradigm Shifter said...

Colin -
This post is exactly why I have been an Atlantic subscriber for years now. Unfortunately, it also displays why I will be switching to a a Kindle-based Atlantic subscription this fall. I find it a bit ridiculous that they make the magazine's content available for free online before I get it in the mail. The Atlantic is a great enough product for me to pay money for it - unlike, say, an AP news story. But I would like to get something for my money, and not be at a disadvantage.

As to Anonymous' comment, I have seen much of the same behavior. I certainly believe in volume pricing and letting the buyer and seller of a product set a price they can both agree on. But some of this behavior, to me, seems to border on price discrimination. The best fix for it is to dis-empower the insurance companies, and make a greater number of health care transaction occur between the provider and the receiver of the service.