Wednesday, August 12, 2009

Health Care: It's Economics, not Brain Surgery

Audio here.

Those pushing for healthcare reform are right - there is a huge problem with our current system, it's just not what they think it is. Despite advances in medical knowledge and technology, most people are only one injury or illness away from bankruptcy. Because health maintenance costs are high, a large number of people wait until problems are serious instead of seeking preventative care, which increases overall costs. Patients are often not getting the care they want (or feel they deserve), and doctors are not happy dealing with the system which favors quantity and throughput over quality and more personal doctor-patient relationships.

Both sides of the debate are over complicating matters by ascribing general motives and value judgments to various groups rather than tackling the derivative cases. There is no health care "system". Health care is an interaction between a set of people who need or desire care and another set of people who are skillful enough and willing to provide care. There can be no long-term solution that ignores this fundamental interaction. The question that is all but missing from the debates is not how the citizens of the country should pay for health care, but "why is health care so expensive?"

The fact that health care is incredibly expensive is causing nearly all of the problems that the health care reform bill is attempting to solve - the bankruptcies, the funding shortfalls, the 47 million non- and under-insured, the deadweight of pensions and the difficulty in running small businesses, and a slew of anecdotes both touching and hyperbolic. Why is healthcare so expensive? Why do we need insurance for non-catastrophic services? Computers, cars, overnight delivery, exotic food – all of these things have increased in quality and decreased in cost over time. Why is it different for health care? Either one of two things are true:

  1. The cost of innovative equipment, procedures, drugs, and the minimum that health care workers are willing to get paid without changing professions really is that high, or…
  2. Something is preventing it from being less expensive.

If the first scenario is true, given the numerous examples of other goods and services in the modern world getting cheaper and better it is unlikely that, unless the second scenario is also true, competition won't have a similar effect on health care. A moment's observation shows that this is not the case. Health care costs have steadily risen as a percentage of average annual income since the first half of this century. While the quality of medical procedures has admittedly gotten better since then, it hasn't tracked with price increases. There is some arbitrary force or set of forces that is preventing the members of the two groups from finding and trading with each other. These include…

The Lack of Accurate Price Information

Here’s the real newsflash. This country already implements socialized medicine; it's just outsourced to insurance corporations through concept of “managed care.” Through a series of perverse tax incentives and disinformation, medical insurance has become equated with medical care. Health care "comes with the job" because it is paid for using pre-tax dollars whereas individually purchased health care uses post-tax dollars in most cases. Consumers are completely in the dark when it comes to what they are being charged for health care, because consumers have been trained to think that it is either “free” or that the $500 per month their employer is contributing entitles them to unlimited medical care. Few ever ask how much a procedure or health care product costs and even fewer shop for better deals. Because consumers aren't going to pay taxable wages toward health care when they can use pre-tax dollars to pay for it, providers have a cornered market and there is little incentive for them to lower prices or compete with one another.

It seems logical that insurance companies would fight for lower prices, but they can easily pass costs on (because costs are hidden from the end user) or write policies so byzantine that there is always a way to deny coverage. Most talk of price is nothing more than a bureaucratic negotiation, just like it would be under universal or single payer health care. The end result is that no one, not even the ultimate health care consumer, is working to lower the cost of care. Even with the pricing mess rampant in the health care industry, one would expect that others, seeing the easy money to be made, would flock to become providers or insurers, and eventually competition would lower costs. Sadly, this isn't the case.

Restricted Supply

The American Medical Association, by getting licensure laws passed, has great influence in the ability to increase the number of doctors legally allowed to practice in The United States. While the organization doesn't want to allow any random person to practice medicine due to concerns about the quality of care, their members have a perverse incentive to artificially restrict supply. The AMA successfully restricted the number of medical schools, pushed out the midwives and homeopaths and created a lot of the restrictive regulations associated with getting an M.D. An increasing number of medical-school applicants are turned away from medical schools leading the AMA to recently change its prediction of a doctor glut to a doctor shortage. Giving doctors the authority to sanctify their own has, unsurprisingly, lead to an increase in health care costs.

But licensure is not the only restriction on supply. In addition to quantity, variety is also restricted through…

Improper and Arbitrary Regulations

This is not the standard debate about more versus less regulation. The debate needs to be about proper versus improper regulation. With regards to health care, regulations that enforce contract and prevent fraud are proper. Those that restrict the choices of consumers and providers, or entrench large firms (except as a side effect of enforcing contract and preventing fraud) are improper. There is too much improper regulation in the healthcare industry.

The health care industry is probably the most regulated industry there is. It is regulated at all levels of government and in all facets. The FDA is one of the biggest offenders: it restricts medicines and procedures that could be saving peoples’ lives , while increasing the cost of approval to such astronomic levels that only Big Pharma can afford to deal with it (you can guess, of course, who lobbied for those regulations). There is no ethical reason to restrict people from trying experimental drugs and procedures so long as they are informed.

Furthering insult, a lot of the improper regulation is arbitrary. At the state level, mandates on insurance companies range from the mildly inconvenient to the downright absurd. In addition to having restricted competition by not being able to cross state lines, many states require insurance companies to cover a host of “ailments”, maintenance treatments, and scientifically questionable services that should just simply be paid out of pocket or be left to the insurer's discretion. Once again, the regulations were lobbied for by those who want to entrench themselves by making it difficult for competing companies to form and by creating a captive consumer base. They are are also pushed by politicians who want to look good to certain groups. Instead of being able to get an insurance plan that fits their expected needs, consumers are forced to pay for a host of what-ifs and are encouraged to use their insurance for everything from chiropractics to gym memberships, which does nothing but cause…

Inflated Demand

Inflated demand, or overutilization as it is known in the industry, stems from the insurance-as-care mindset. Since the launch of Medicare, this mindset has caused all those who would be making life-choices about their own medical care to take everything they can possibly get, use treatments they may not even need, and avoid economic choices about the kind of care which best fits their needs and means. After all, it’s free, right? This has caused the demand for health care to explode far beyond what is would if it were bounded by correct pricing signals.

Conclusions and Pragmatic Health Care Reform

So, ladies and gentlemen, what happens when you increase the demand and restrict the supply? Prices increase. It’s economics, not brain surgery. We are now on the cusp of the largest manipulation of peoples’ real choices and real desires since the New Deal, and for some reason, we expect it to turn out differently.

We can solve these problems in a graceful and pragmatic way as we transition to eliminating the lies. Given the choice, we'd take the following steps:

  1. Decouple health care from employment

    People are afraid to change jobs and, in doing so, end up changing health care providers earning them the dreaded "pre-existing conditions." Either all health care expenses should be pre-tax, or all health care expenses should be post-tax. While employers and coops could still bargain for better rates, consumers would be able to shop around for better deals. Plus, it's fair.
  2. Eliminate state mandates on medical insurance and extend the ability of nurses and EMTs to perform care.

    This would increase the supply of care and increase competition for insurance. Steps would have to be taken to ensure that existing plans are unchanged, but combined with step one, it is likely that a lot of people will start renegotiating their insurance plans.

    By lowering the barriers to entry for insurance companies, new insurance solutions could be created such as lifetime genetic disorder insurance and discounts for preventative care that finds problems early.
  3. Transition people out of the current system by creating temporary medical welfare for the poor

    At the end of the day, this is what we really care about - poor people dying because they can't afford care. It is acceptable to have a medical care "buffer" as we transition to a freer system, but it should be temporary and have a sunset date.
  4. Hold people to the letter of contract

    It sounds harsh, but holding people and companies to the letter of contract would be the best thing to happen to contracts. Currently contracts are padded with so much legalese that the average person signs knowing that portions of it will never be upheld. This leads to increased attempts to close loopholes making contracts further unreadable.

    If people were held to contract more consistently, they wouldn't choose to sign things they didn't understand and companies would be forced to make increasingly simple contracts.
  5. Perform the more major changes

    Transition the FDA, AMA, ADA, and the like to simple certification bodies that have no power of licensure. Their power would lie in suing people for trademark infringement and preventing or granting approval based on their internal set of standards. Allow other companies (consumer reports, etc.) to provide consumer feedback on medical care. Eliminate any remaining bad regulation.

Boring! Where's the Anecdotes?

We almost forgot! Statistics are facts that only make people's eyes glaze over, and since no discussion about health care is complete without anecdotes, tugging on heartstrings is a great way to sum up a debate tidily. We’ll leave you with two.

In the recent cash-for-clunkers program, the Federal Government somehow thought they had the authority and the brilliant idea to give anyone who discarded their functional used vehicles $4,500 towards a brand new car. They touted it as a success because so many people are using the program – which of course they are, who turns down a $4,500 subsidy? The result is, of course, that the price of new cars has gone up, hurting the ability for anyone who does not qualify for the program to get a new car. People who probably actually wanted or needed one. What makes you think for one moment that health care is any different?

Lastly, there is one health care procedure that has been an all but revolutionary miracle of modern medicine, and has continuously decreased in price and increased in quality since its inception. That procedure is Laser Eye Surgery. They’ve gone from only being able to treat certain kinds of eye sight loss and having to cut open your eye with a scalpel to being able to treat astigmatism and using a laser for the whole process that takes a matter of minutes to accomplish. Want to know how this is possible? Insurance doesn’t cover it. Maybe we should take that as a clue.