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Sunday, February 11, 2007

Healthcare: Right or Wrong?

Members of Congress and virtually every 2008 Presidential hopeful have begun beating the drum for vast changes to healthcare and insurance coverage. Having 536 politicians attempt to solve a $1.9 trillion dollar problem (#1) is worrisome enough. What's worse is all seem bent on solving the wrong problem -- easing the burden of the cost of healthcare via universal coverage or token tax deductions.

Define a problem incorrectly and you're almost guaranteed to come up with the wrong answer. The problems of healthcare quality, availability and cost are related but SEPARATE problems. The debate over ways to address these problems is better served by first considering a few key questions:

#1) Is healthcare a "right"?
#2) What should the real goals around healthcare be?
#3) Does insurance address a need or subsidize a problem?
#4) What's the prescription, then?


Is Healthcare a "Right"?

Barack Obama seems to be the first high profile politician who has explicitly used the "R" word in relation to healthcare. His website clearly states:

…health care should be a right for everyone, not a privilege for the few. (#2)

As of February 2007, others have avoided the "R" word but have proposed (Schwarzenegger in California) or actually enacted (Mitt Romney in Massachusetts) large-scale restructuring of insurance plans at the state or national level, pretty much treating healthcare as a right or at least an irresistible sop to the voting public.

In my view, a "right" is something you possess simply by being born that imposes no costs on others for you to maintain and provides value to you and others by you continuing to possess it. Life, liberty and the pursuit of happiness are the most obvious and useful examples.

Healthcare definitely does not satisfy this definition at the philosophical level. I was not born knowing how to manufacture blood pressure medicine or perform open heart surgery. No one else was born with these skills either, meaning any person WITH those skills expended their own effort and sacrificed other opportunities to acquire those skills. Therefore, I don't have any "right" to consume a good or service produced by someone else unless they provide it of their own free will.

The flawed logic of treating healthcare and insurance as a "right" is more obvious after considering a simple economic example. Imagine a rare fatal disease that affects 0.01 percent of the population. Imagine a drug that cannot cure the disease but can completely eliminate its symptoms if taken for the rest of the life of the patient. Suppose the drug costs $20,000 per year. Do the patients afflicted with this disease have a "right" to this medication, even if they cannot afford the $20,000 per year for the rest of their life?

Before you answer, imagine an alternate case involving a drug developed to halt the damage done by a disease that helps fifty percent of the population (maybe a drug that lowers cholesterol, prevents heart attacks and blocks adult ears from hearing Britney Spears music). That drug also costs $20,000 per year for the rest of each patient's life.

If the population has 300 million people, the cost of covering drugs for the rare disease would cost $600,000,000 for the 30,000 patients yearly. Six hundred million is a lot of money but for a country with a $12.9 trillion dollar economy and a $2.6 trillion government budget, it's a rounding error on a rounding error. The cost of the drugs for the common disease on the other hand is $3 trillion. Uh oh. That's more than the entire federal government budget.

Is a "right" only a "right" when we can afford it? Clearly, that's not a sound, logical definition of a "right". A "right" that we cannot afford to provide to all citizens isn't a right but a different type of problem requiring a different kind of solution. It's an important problem and one worth solving, but labeling it a "right" is likely to confound the problem rather than clarify it.

What Should the Real Goals Around Healthcare Be?

With a small handful of exceptions that often involve tort law reform, most proposals for "solving" the healthcare crisis jump straight to easing the burden of the final cash cost of care and drugs paid out after care is already needed. While costs are an easily measurable part of the problem, they are primarily an OUTCOME of the underlying problems, not a CAUSE. Any proposals to reduce the size of our healthcare problems should first start by thinking of the GOALS of any proposal. The goals of a revamped healthcare system should be:

1) reducing the need for healthcare
2) improving the quality and timeliness of treatment
3) reducing the inefficiencies of administering insurance benefits

These sound simplistic and obvious but merit explanation.

Reducing the need for healthcare -- Americans don't want really want free heart surgery or free Plavix prescriptions for life. They want health, not healthcare. In many cases, it is far more economical to identify ways of discouraging behavior that harms health than it is to treat problems after the fact. What does it cost to NOT sell children 300 calorie soda every day for six years of middle and high school? What will it cost to treat the problems from skyrocketing levels of adolescent diabetes and obesity?

Improving the quality and timeliness of treatment -- The variety and complexity of modern medicine is simply astounding at both the scientific and practical level. However, so is a modern automotive assembly line or electronics manufacturing plant. Given the share of GNP spent on healthcare, the degree of modernization in hospitals, our main "manufacturing" plants for advanced healthcare, would astound any process design engineer for an auto maker or manufacturing firm. If you talk to any patient or their family in a hospital, you can usually hear of a story of a patient getting left outside a lab room in a hall on a wheelchair or gurney as they wait unattended for their transport tech to arrive to wheel them to their next test or back to their room. Do you think Toyota loses bumpers for Camrys in random locations on the factory floor? If patients get lost between tests, you can be sure test results, doctors' orders, and observations about patient status for shift changes are also getting lost, directly affecting care.

Reducing the inefficiency of administering insurance benefits -- Note that this goal isn't aiming at reducing or capping the cost of actual care provided. Imposing arbitrary caps on the price of services delivered or drugs / devices provided only widens the influence of the two groups least qualified to judge what's appropriate -- the government and big insurance companies -- and is likely to limit supply. Instead, focus should be applied to the mechanics of insurance itself -- applying for it, submitting claims, verifying actual expenditures for claims and handling malpractice suits against doctors and hospitals.

Does Insurance Address a Need or Subsidize a Problem?

Skyrocketing healthcare costs and 50 years of employer-provided insurance have blurred healthcare and healthcare insurance into a single monolithic "good" in the eyes of individuals. Insurance coverage and healthcare are not the same thing. Thinking about them separately allows important issues to be addressed that can improve both areas.

The purpose of insurance is to protect individuals from large financial risks whose occurrence cannot be accurately predicted at the individual level but CAN be accurately predicted over a larger group over a larger period of time over a larger geographic area. When you buy a car, there are costs associated with your purchase that are quite predictable (property taxes every 12 months, $29.99 oil changes every 4000 miles, tires every 40,000 miles or so, timing belts every 60,000 miles or so, etc.). The likelihood of the car being damaged by hail or totaled in an accident is far more difficult to predict at the individual level but can be accurately predicted over a population of one, ten or on hundred million drivers. When you buy a car, no one offers you insurance for oil changes, tires and timing belts because the costs are small, predictable and directly related to the normal use of the car. In situations with predictable and directly related costs, the overhead of formalizing coverage, collecting premiums, analyzing claims and cutting checks greatly exceeds the value of the "protection" so it is cheaper to pay those expenses directly.

No one has trouble understanding why car insurance doesn't cover oil changes, but the lesson has been completely forgotten in the world of healthcare insurance. For most policies, insurance attempts to cover virtually ALL expenses after token deductibles. However, the "predictable / directly related" test for insurance should apply equally well to healthcare as it does cars. For example, having a child involves a multitude of very predictable expenses:

* pre-natal doctor's visits ($150 x 5)
* delivery and possibly 3-5 days of hospital stay afterwards ($10,000)
* newborn pediatrician visits from delivery to age 2 ($150 x 12)
* yearly physicals from age 3 to 18 ($150 x 15)
* probably three different child car seats as the child grows ($600)
* immunizations (???)
* routine dental cleanings twice a year for 18 years ($240 x 18)
* yearly routine eye exams for 18 years ($120 x 18)

That's $21,880. And these are just some of the expenses if you have a healthy child that never sprains an ankle, never gets an inner ear infection, and never needs braces or eyeglasses. Although these items are expensive, there's very little "risk" involved with them per se, either in their timing or level of expense. If you have a child, YOU WILL INCUR THESE EXPENSES. However, other than the car seats, most of these costs are covered by insurance plans. Why?

Two reasons. Large businesses spent the last fifty years gradually raising expectations of included care because initially they could afford it and eventually because the practice became institutionalized, both through union contracts and benefit plans for non-union labor. Trends over the last fifteen years have exposed American business to competition from countries with lower costs or non-existent coverage at the same time the variety and cost of covered care has mushroomed. Reversing expectations has proven very difficult, though most Americans are finding employer contributions shrinking each year.

These predictable expenses are also covered because they have become an implicit subsidy for families, much like the child income tax deduction. Obviously, if would-be parents knew they would bear the full cost of each child directly, many might opt to have fewer children or no children at all. For a society and economy that depends upon a growing population, it's certainly likely that the government would pursue policies to enable the desired level of population growth. However, in the case of healthcare, it is apparent that subsidizing the routine portion of medical expenses has worsened the problem.

I've written previously (#3) about a culture of "faux conservatism" that develops when people demand the "freedom" to make bad decisions while the true cost of those bad decisions is essentially subsidized by bad public policy. There is probably no area of policy where us true, rugged, individualistic Americans need to either put up or shut up than healthcare expenses. If you don't want the nanny state limiting your ability to buy cigarettes or eat trans-fat loaded food from restaurants or your grocery store, then why should the nanny state cover any of the cost of your triple bypass you'll need forty years after you begin consuming those products of your own free will?

What's the Prescription?

It's impossible to outline specific solutions to such a vast problem in bullet form but it is possible to identify the key areas on which solutions should focus.

Separate Routine and Emergency Care Models -- The current all or nothing coverage model offered by most insurance companies produces two key problems. If I go to the dentist twice a year ($240) and to the doctor once a year ($150) for a physical, there's no "risk" or uncertainty to those expenses as cash flows to me or my insurance company. In an efficient market for insurance, any company providing "coverage" for those expenses for less than $390 per year would go out of business and any company charging more would lose customers until they lowered their price to $390. Payment for these routine expenses via insurance instead of cash obligates my doctors to spend additional time having nothing to do with care filling out claim forms so a $390 expense becomes more than $390 after paying that extra "insurance inefficiency" tax.

The real problem with including routine expenses in an insurance model is that it clogs an already-inefficient healthcare and insurance system with more work, distracting the system from more efficiently addressing emergency issues more suited to an insurance / risk-mitigation model. This is partly why it costs $5.00 per pill to get an aspirin in a hospital. Even if YOUR stay is going well without surprises or complications, you pay astonishing rates for routine tasks because procedures don't always go well across all patients. This "cross-subsidy" approach is useful in some circumstances but not if the subsidy is masking the true cost of care from being associated with its true cause. A great example would be that $5.00 aspirin helping to defray the cost of using the ER to treat gunshot wounds for uninsured patients who shouldn't have been shot in the first place. Instead of making it easier for me to afford the inflated $5.00 aspirin, that money should instead be targeted at reducing the primary problem (violent crime in this case) instead of a secondary effect (expensive aspirin).

Standardize Healthcare Application / Payment Systems -- The variety of forms and rules used to apply for coverage and process claims combined with hundreds of major insurance companies and tens of thousands of hospitals and practicing physicians results in a grossly inefficient system that adds expense and harms the quality of care by focusing time on claims instead of care. Standardization of forms allows standardization of systems that process those forms which aids competition between insurance providers for customers and competition between vendors designing IT systems handling all of this work. President Bush actually suggested something along these lines in the 2007 State of the Union address. (#4) I also suggested this tactic in 2005. (#5)

Standardization also has the potential to provide other benefits as well. Standardization can help small business by reducing the cost advantage big business gets by buying insurance for thousands at a time instead of tens at a time. The combination of streamlined claim systems with a reduction in routine expenses going through the system may also make it possible to reduce the amount of systematic fraud conducted by hospital chains and nursing homes. Uniform claim processes make it easier to spot unusual patterns and reduced volumes allow closer scrutiny of the claims that are submitted.

Rationalize Tort Law and Quality Control -- A common explanation for the high cost of health care is the jackpot mentality of lawyers and plaintiffs attempting to collect outrageous settlements for botched surgeries or just bad outcomes in bad situations. Skyrocketing malpractice insurance rates directly increase the cost of care provided but also indirectly raise it as well by reducing the supply of doctors willing to practice.

One solution frequently proposed involves capping payments for malpractice judgments. This makes a lot of sense with one major caveat. Doctors and HMOs that employ them should not be granted caps against damages caused by malpractice without drastic improvements in the transparency of statistics about basic care provided by individual doctors and hospital facilities. Numerous states have pursued uniform disclosure of infection rates since infections alone account for nearly 90,000 deaths per year. (#6) That's 90,000 people going into a hospital and dying of something unrelated to why they entered the hospital. There are numerous aspects of practicing medicine that do not lend themselves to simplistic time/motion studies like a auto factory but there ARE lessons that can be learned from watching and publicizing outcomes to isolate bad habits or bad doctors. The medical community should get no relief on tort reform without consenting to more open disclosure about outcomes and the competence of individual doctors.

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#1) http://www.nchc.org/facts/cost.shtml

#2) http://obama.senate.gov/issues/

#3) http://watchingtheherd.blogspot.com/2006/07/losing-elections-faux-conservatism.html

#4) http://www.whitehouse.gov/news/releases/2007/01/20070123-2.html

#5) http://watchingtheherd.blogspot.com/2006/05/problems-with-economy-fixes.html

#6) http://www.hospitalinfection.org/infectionfacts.shtml