Hope you're not all too sick of my health care rants. This time I want to talk about “root causes”. The insurance industry recently published a report that says the health care bill as it is now will increase the cost of insurance dramatically. To that I say “Duh!” Now there is partisan posturing on the report, with all sorts of cr*p flying around (sorry, too tired to think of a wittier and more polite way to put it). So, what does Mike think?
I think none of the proposed legislation addresses the root cause, the cost of health care. Furthermore, I don't know of any political group who wants to address or even discuss the issue. One side wants to keep the status quo and the other wants to throw more money into the (broken) system we have. I think they are both wrong.
50 years ago (well, perhaps 60) the doctor would come to your house and treat you, and you could afford it. Today, the level of care is much lower and it costs a huge pile of cash. What happened? Why is it the $800 TV of yesteryear costs under $100, and the $1,000,000 computer of that era costs less than $5, but the cost of a doctor visit with a cold has gone from $10 to $250? Well, you might say “that's technology, and a Dr. visit is people.” Aside from the fact that a lot of medicine is technology these days, let's do apples to apples. The average income in 1950 was about $25,000 (http://www.visualizingeconomics.com/2008/05/04/average-income-in-the-united-states-1913-2006/). Today that number is $45,000. So you would expect the cost of a person's time to about double.So why isn't a Dr. visit $20?
One thing that drives up cost is supply and demand. According to http://social.jrank.org/pages/1186/Medical-Professionals-Number-Doctors-Up-Doctors-Are-More-Diverse.html, in the United States in 1949 there were 127.7 physicians per 100,000 population and 260 physicians per 100,000 in 1996. So how come it's so hard to get an appointment and our doctors are so busy? I honestly don't know. I might guess it has to do with the number of specialists today as opposed to 1950. While it's true most of this growth has been in specialists, there has been a slow but steady growth in the number of primary care physicians per capita over the years.
My theory (and it is only that) is that it has to do with insurance. In 1950 most people didn't have insurance for doctor visits (and yet, they didn't all die horribly, as some people claim happens to the uninsured today). They had what was called “major medical” which would cover only, well, major medical expenses. So you had doctors getting paid cash at the time of service. Now many doctors' offices have full time staff whose job it is to deal with the insurance companies. They have to document and justify to the insurance companies everything they do to treat each patient. The insurance company expects or demands a discount over the “retail” rate, and takes several months to actually pay up.
So now, to pay his staff, the doctor has to charge $30 instead of $20, and in order to get $30 from the insurance company has to charge, say, $50 for a “standard” office visit. I'm making up numbers, of course, but you see where the trend is. But we're not done.
There's a saying, “what gets measured gets done” and it's true in many situations. I heard a story recently about Bel Labs (a place I miss dearly). AT&T, as you know, was at one time a legal monopoly. Typically, in such a situation the profit of such a company is regulated to protect the interests of the public, and things stagnate, because there are no incentives to improve or change the system. But the story of AT&T is a little different. They were allowed a reasonable profit, but they could also keep money made from reducing costs by improving the system.
Thus, the company poured money into Bell Labs' Research, which became not only the way AT&T made money, but one of the most innovative research groups of all time. Things like information theory, the laser, the transistor, fiber optics, and literally hundreds of other world-changing inventions came out of the Labs, until the government disbanded AT&T in 1983. My point is that companies will do whatever they can to make money, or to generate value for the stockholders, as an economist might say.
Well, the insurance industry is pretty well regulated. In this case, the government has set a cap on profits of 4% (I believe, gotta find a reference). So if you're allowed to make 4% over costs, how do you increase the amount of money you make? By increasing the cost, of course! I'm not saying insurance companies are evil. What I am saying is that there is no incentive for them to reduce the cost of healthcare and every incentive to watch it go up.
How can an insurance company increase its cost/profit without “wasting” money? By making more overhead for the physicians involved, by engaging in spurious legal actions, by increasing marketing costs, by encouraging regulation and legislation which, while it may not affect them directly, affects their overhead. The cost (plus 4%) gets passed along to the consumer. So now you have a doctor who has to pay an insurance company for a malpractice policy to protect himself from being sued by another insurance company. It doesn't matter if the suit is justified or frivolous, the insurance company makes its 4% on both ends.
I've read that something like 50% of what a doctor makes goes to insurance. I have no idea how much that was in 1950, but it couldn't have been much with a $10 office visit. So factoring in the cost of insurance our $50 visit might cost something like $90. But we're not done.
A significant cost is that of all the tests that are performed these days. A doctor can't just look in your nose throat and ears and tell you to take 2 aspirin. You have to have a strep test, and perhaps more. My wife recently had a glass shatter and a piece went into her hand. We went to the emergency room, where she got stitches, but first there were a whole series of X-rays taken. They said they wanted to be sure it didn't “nick the bone.” What would they do if it had? Nothing different, but they wanted to “be sure.” Of course, they couldn't take her word for it that she wasn't pregnant, so they had to draw blood and do a pregnancy test, just to “be sure.” Why? Well, insurance again. If they didn't do these tests, they wouldn't be covered if something went wrong and they were sued (by the insurance company). Another case of insurance driving up the cost. 4% anyone?
Anther significant cost is pharmaceuticals. For that visit she had to be on powerful antibiotics for 2 weeks. First off, why? The cut was clean, made by a glass just coming out of the dishwasher. She had immediately bandaged it, and they cleaned it and applied topical antibiotics and disinfectants at the hospital. Oh yeah, insurance again. Secondly, the antibiotic was expensive ($120, if I recall correctly). Why so expensive? The pharmaceutical industry of course.
Unlike insurance companies pharmaceutical companies can make big profits (28%, if I recall correctly, it was in a Yahoo! Finance report recently). Now, I understand that developing a new drug or medical product is a long process (because of government regulations, most of which are designed to protect the public) and so the company should be entitled to a reasonable return on such a long investment. However, under our intellectual property laws pharmaceutical companies are encouraged to continually replace products with new products, even if the new ones are similar to (or inferior to) the one they replace. This ensures that they are allowed to make maximum profit. Once again, not evil, but what gets measured gets done.
Of course with all those new products, we'd expect marketing costs to be high, and pharmaceutical marketing and distributing companies are way up there in profits as well (20% if I recall correctly). And of course, in addition to the overhead of FDA and DEA regulations and oversight, there's all the insurance the pharmaceutical companies have to keep to protect them from being sued by insurance companies.
Add it all up, and you can see where the cost of that doctor visit is a natural byproduct of forces, mostly having to do with the way the system is regulated by our current laws. Maybe you want to quibble with the numbers a little here or there, or maybe you think this is too simplistic. Maybe you're right, but that's what I think.
So what are some things we could do to fix these trends?
- Make doctors, not insurance companies, the ones who can decide what tests and treatments are required.
- Cap consumer insurance costs, not profit margins, and allow insurance companies to increase profits by reducing costs of services.
- Provide disincentives for frivolous lawsuits.
- Change intellectual property laws to allow pharmaceutical companies to make a more reasonable profit, and to discourage “drug turnover”.
- Eliminate the practice of health care “discounts” to insurance companies.
- Eliminate the practice of “bribes” to doctors for prescribing high profit drugs.
- Eliminate the practice of “advertising” new high profit prescription drugs to consumers (and perhaps even to doctors).
- Allow/encourage individuals to make their own heath care choices. There's no reason I should pay an insurance company to pay me for my regular checkup, for instance. I could as easily pay it myself and lower my insurance cost by that amount.
And then there's the big bugaboo of “pre-existing conditions”. Proponents of the health care bill say it's great injustice (which it is) and that the only way to solve it is to require everyone to have insurance. Insurance companies fear that if the government doesn't sufficiently “punish” people for not having insurance, they'll just wait until they're sick, sign up, and be a drain on the system.
Now, think of the absurdity of the situation. The premise is everybody want health care and they can't get it. But we have to punish people to force them to take it? You can't have it both ways. Fortunately, you can have it neither way. Why not require insurance companies to take people with preexisting conditions provided they were already insured recently (by any insurance company) or they are below a certain age (e.g. children). I think that covers the big fear (if I lose my job I can never get insured again) while eliminating the big scam (I'll wait until I am sick before buying insurance).
Why aren't any of these suggestions being considered to help solve the health care “crisis”? None of these increase the wealth of big business or big government, so there's no incentive. After all, “what gets measured gets done.”
***UPDATE***
Since I posted this someone pointed me to http://contractfromamerica.com/IdeaCategory.aspx?categoryId=81fbfb53-0b1d-4c0e-aed7-7e4b1156045d where many other people have posted ideas about solutions for health care. While I don't agree with some of them, there are some that seem to make sense to me but that I missed mentioning in my original post.
- Crack down on Medicare/Medicaid fraud. I hadn't overlooked this, but considered it such an essential prerequisite for any other reform I felt it didn't need mentioning. Perhaps it does. I think it's criminal to implement any solution without first address this.
- No special insurance for law makers. This would make increase incentives for law makers to solve the problem. Frankly, I think it's unconstitutional for Congress to enact a law that does not apply to itself. They should not be "above the law" as it applies to citizens of the United States.
- Provide a tax credit/deduction for contributions to health care providers or health care insurers for the purpose of covering the poor/uninsured. If we can get a deduction for our own heath care, why not for others'?
- Separate insurance from employment. My place of employment doesn't provide me with auto or home insurance, why health care insurance? Yes, I know it's in the interest of the company to see that I stay healthy to work, but isn't it also in their interest to see I have a place to stay so I can work, and to see that I have transportation to get to work? Where does there interest in my stop. Should they feed me, to ensure I get proper nutrition so I can work? And yes, I know I can refuse health care coverage from my employer, but the cost difference is astronomical, which brings me to...
- Provide same tax benefits to individuals the employers enjoy. I don't think it's fair to afford a business any rights or opportunities that are not available to individuals.
- Allow insurance companies to compete across state lines. Note I'm not saying force them to, but allow them to.
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