Health Reforms 2007

Occasionally, I spend my leisure time in the most unexpected of ways. Most people do not relax by reading healthcare plans from four of the leading Democratic Presidential Candidates. But I did. For political balance, I reviewed Chapter Four, Improving Incentives in Health Care Spending, of the 2006 Economic Report to the President. Rational balance was provided courtesy of the famed consulting firm, McKinsey & Company, through its article, Universal Principles of Health Care Reform, published in the first quarter of 2007. As my review concluded I asked myself, are these political proposals of consequence? Pensive voters wonder if the new proposals will make life better, or if the nations’ low approval rate for the current administration helps undervalue good ideas like Health Savings Accounts or following free market fundamentals.

In short, neither Democratic presidential hopefuls nor the Bush administration’s perspective addresses the true underlying difficulties in the American healthcare system–the lack of a discerning consumer and the country’s ineffective trade off between the three primary objectives in the provision of healthcare: fair access, high quality, and low cost. Every country struggles with balancing the competing objectives. It is no wonder then, that when politicians search other governments or policy think tanks for answers, perfect solutions do not exist. The politicians inevitably select options lacking a successful virtue or an effective vision.

The Current Environment

A critique of the current healthcare environment helps the understanding of the proposals. I like the quotation from Robert Penn Warren where he said, “History cannot give us a program for the future, but it can give us a fuller understanding of ourselves, and of our common humanity, so that we can better face the future.” The stark reality is that this country’s medical environment is characterized by lower numbers of trips and rising price per trip for medical services and inappropriate incentives for people who make healthcare decisions. Doctors in the United States are paid higher than most comparative countries. Without question, the US is the biggest economy in the world and therefore a high rate of pay should not surprise anyone, but the core issue of rising price per medical service trip results from the existence of two overwhelming incentives, avoiding lawsuits and earning profits from uninformed consumers, which both encourage frivolous test and procedures.

Malpractice insurance is an overwhelming cost in the income statement of any medical practitioner. The intuitive effect is expensive premiums lead to high prices. However, the reality for many professionals is that leaving yourself open to second guessing is the costly financial adventure, therefore, the prevailing wisdom is to order test despite a low expected benefit to patient health. After all, it is easier to say “I did everything I could,” than to justify why a test was not ordered—the low risk approach to ordering test. The second incentive is pure profit. The more test ordered the more profit the doctor earns, especially in those instances where the medical practitioners has a financial interest in the laboratory that conducts the test. Commonly medical professionals have ownership in their service providers.

Consumers in the US rarely know the price of their services and undeniably make the majority of their purchase decisions under duress. As with most professional service fields, a significant knowledge gap between the client and the professional exist. Indeed during times of no duress, patients find it difficult to challenge, question or second-guess their medical professional’s recommendation. In recent years, drug companies have started to exploit the low risk approach phenomenon by using advertising to encourage the uninformed but concerned, the patient, to request and challenge the knowledgeable and trained, the doctor, to use an advertised drug. The doctor, concerned about patient happiness and avoiding lawsuits, follows the path of least resistance–avoids the perception of negligence and lets the patient win the small battle. Most medical professionals when faced with this alternative would rather begin treating the next patient than spend time educating and debating an ornery misinformed patient. Win or lose the debate results in less profit—longer average service time with less procedures ordered for the day.

Consumers in the United States have surprisingly little incentive to perform preventive care. Broad group insurance coverage encourages a belief that any bill for any services is covered. The 2006 Economic report to the President, named this issue “First-Dollar Insurance” because the economic incentive is to pay all medical cost through pretax group insurance policies. No doubt, the system grew out of a genuine desire to take care of the undereducated with hopes of regular treatment. However, for most people doctor visits have unnecessarily high transaction costs: paperwork and deductibles, therefore, they wait until acute needs occur and believe the best services available are waiting to treat them.

With these perverse incentives to provide insurance to all the employed, it is sometimes hard to believe that the US has too many people with inadequate access to medical care. According to the materials on John Edwards campaign site, 47 million uninsured Americans exist, about one in six residents. Too high for the richest economy on earth, don’t you think? Consider for a moment, how long does it take to come in contact with five people where an infectious disease could be spread. In the urban cities of America it is every retail establishment restaurant or school. Minutes, if not seconds of your day. In the small towns, it may take longer but the inevitable contact with a traveling salesperson means that isolation is a nonexistent concept in the United States. The degree of human interaction creates health concerns that an untreated infectious disease can bring havoc to the economy. Surely, we have addressed the major health risk with sanitation, potable water, and health standards for most public places; however, as the recent bird flu risk assessments have demonstrated, new diseases require new risk assessments.

There is another unintended consequence of First-Dollar Insurance, it encourages the introduction of technologies with marginal benefits at higher prices. For the medical service provider faced with flat to declining trends in the number of patient visits, the only way to increase income is to conduct more services, or to replace a service with a new higher costing one. Justifying the additional value in medical services is unlike any other arena of our economic system, because the patient decision-makers are not making cost benefit trade-offs, they are under duress. Patients want the latest and greatest techniques because perception says, “the grass is greener on the other side of the fence.” Some technology improvements do indeed yield healthcare benefits, but for many improvements the benefits do not always cover their cost. Insurance carriers focused on defining usual and customary cost are not making cost benefit trade-offs. Hence, no one makes these trade-offs in the delivery of healthcare in the United States. Thus the introduction of technology is supported by multiple rationalizations, none of which support improving the quality of healthcare; consumers seek the latest and greatest, healthcare providers demonstrate they have done everything medically possible (not appropriate, not warranted, but possible) and insurance companies pay a fair relative cost. Little wonder the environment encourages low marginal improvements.

Competition where it does exist, is often on factors contributing to comfort, status or perception. Rarely is competition on the ability to improve life and well-being. This lack of competitive environment has a similar effect on prescription drugs. Global companies manufacturer and distribute drugs, throughout the world, yet government regulations do not explain the price differences; same companies’ drug, different name, unjustifiable price difference. Poor countries have long argued to maintain these differentials by saying that America, the richest country, should pay more for drugs and fund a disproportionate amount of research and development. Study after study confirms that US citizens pay the highest prices for drugs in the world. The gaps have become so large that now it is common to hear of schemes for prescription drug smuggling.

The Internet has done wonders to expose the artificial use of borders for price discrimination practices. Economics 101 confirms the benefit to any company that can figure out how to effectively price discriminate so people pay a price close to their value for the product or service should as all the benefit accrues to the company with little loss of economic benefit to society—the high price to those willing to afford it makes possible a low price for the larger number unwilling to pay. Encouraging lower prices in the rest of the world (a UN directive for securing world health) necessarily raises the price in the USA. However, once the wealthy see an opportunity to save money they will. Thus Internet trading in drugs, prescription drug runs to Canada and Mexico, and presidential candidates’ arguments for legal import of prescription drugs, all exist, however, establishing a policy to import drugs does not fully address the global dynamics of the drug policy arena.

Dangerous Ideas

The political candidates’ solutions are heavy on implementation efficiency but lack the true structural changes required for success. For the Democrats the solutions fall in line with their typical marching cries: universal coverage for all, negotiated prices from a single payer, access through mandatory employer health insurance, and other measures, designed in essence, to help those who cannot help themselves. For the Bush administration, the war cry has been to let the free market fix itself–once we give it a little nudge with Health Savings Accounts. I found both groups’ proposals immensely disappointing, because they follow flawed cause and effect hypothesis in their attempts to right the economic incentives—they are valuing expediency of political gain over substance in solution. The existing healthcare infrastructure is broken. Policy incentives do not promote health improvement. This must be addressed.

Two flawed cause and effect proposals deserve detailed comments. The democratic proposal to automate medical insurance records is an outright gift to the software manufacturers and technology consultants. Some candidates are promoting that we transfer medical records from paper based systems to electronic databases with the promised benefit of better accuracy, better transportability of records, greater sharing of information between doctors and greater healthcare for all. Gag me with a spoon. If we achieve the accuracy of most state department-of-motor-vehicle databases or voter registration databases, I will take a wager on greater harm than good. The government’s history of using digitized data for the good of society is not stellar. With the ability to have electronic rather than paper mail, we have seen people spied upon by their government and employers, and documents released to unintended recipients (inadvertently and intentionally) at a pace far greater than ever suspected. Sharing an e-mail with a display of poor judgment is one thing, inadvertent distribution and use of medical records, will cost jobs, disrupt financial planning, destroy privacy, embarrass families and more. How many examples of identity theft, computer losses of databases with personally identifiable information, illegal wiretapping allegations, or database security compromises do we need to realize that not all digital conversions are golden. Rightly, privacy hawks worry. Medical records in easily transferable modes have more harm than good attached to them. I’d like to see a politician demonstrate the greater good, while acknowledging the legitimate risk as a worthy cost for the population. It is flawed analytics to argue and debate the benefits without acknowledging and debating the risk, yet it is politics 101 in how to get elected.

The proposed policies to establish a large single buyer to better negotiate prices are an outright joke. The core presumption, single large buyer is better negotiator against large companies, is an invalid and unsupported assumption. We have large single negotiators today (insurance companies) and our prices for medical services are the highest in the world. In addition, the government has never demonstrated an ability to negotiate low prices. I think the military and no-bid contracts to political supporters experiences serve as poor examples of government prowess (and as good examples of significant risk) in purchasing. Yet there is an equal analogy of human necessity dominated by large global corporate suppliers: food. Thousands of transactions to purchase food occur daily without the aid of a large single buyer facing massive global corporations, and the US has the greatest and cheapest food distribution system in the world (Yes much like gasoline, the US uses the most and has relatively cheap food). So how does the food industry do it? The answer is not single price negotiator. High levels of competition for food providers with transparency of prices and services is the key. It is easy for consumers to understand the prices of food, and they alter their behavior based on circumstances. Those with better food delivery are rewarded. In medical services, policies need an orientation to addressing the lack of transparency in service cost, success rates with past patients, and differentiating approach to diagnosing and curing medical conditions.

Good Policy Objectives

I wish I had more answers but a policy wonk I am not. Policy wonks add value by designing public policy that yield behavioral changes meeting accepted objectives. As the elections approach, I will evaluate the candidates’ proposals on a few key policy objectives. I consider it imperative that healthcare reform provide greater incentives for consumers to make choices while not under duress. For some this requirement will be preventive care, for others it will be preparation of living wills or maybe a new form of planned medical guidelines for the provision of care when a person cannot be consulted. Healthcare reform policies must demonstrate just balancing of the three dimensions of healthcare—“fair access” “high quality” and “low cost”—across society. For me, the balance and objectives change depending on the health services considered.

Infectious diseases requires a focus on access and low cost. The society cannot poor access or treatment delays when an infectious disease threatens. The example of the young lawyer traveling after his diagnosis with a rare and resistant form of tuberculosis provides a vivid example of how lax our infectious disease controls are and how unwarranted disease exposure risk occurs. Thank goodness, nothing worse happened. Equally, it would be unacceptable for a retired citizen with an infectious disease who lacks funds to go unattended.

Where medical services are needed to address problems caused by others the focus must be on fair access and high quality. If anyone is injured in a car accident not of their fault, or in a workplace accident because of a management dictated work process, there should be no debate that restoring them to the state of health before the accident is the goal.

The dimensional focus for medical services of personal choice should be on high quality. This class of medical service likely the most controversial as the poor would have limited access to medical services of choice. When the example is cosmetic surgery, everyone mostly agrees, but when the example is a preventive treatment for a noninfectious disease, for example cancer, then not having access to the best available care will cause some concern. However I predict, an unexpected benefit, service providers will innovate to meet the needs of the marketplace. In the future environment when consumer say no not at that price, entrepreneurs will respond with, okay, I’ve made some changes how about this new price—this occurs today in every professional service environment except healthcare.

Healthcare policy must have incentives to deliver transparency of costs and service levels. The environment of “I have insurance coverage, therefore, I want the treatment, damn the appropriateness” must to end. Insurance mechanisms to share risk still have a role, especially to cover liability for medical care caused to others but the days of insurance pays for everything I want must end.

Healthcare reform needs to figure out how to instill an appropriate mechanism for financing health services. Today’s package of everything through a vague nebulous insurance pool or charge it on your credit card should end. The chief goal of financing schemes, has to be instilling responsibility for healthcare decisions and encouraging behaviors that allow families to make medical decisions independent of financial duress. People have to see a reason to invest in preventive healthcare. Presuming there is no need for preventive care because I have insurance for when I get sick is madness. Liability insurance is needed to encourage care in workplaces, employee care, and our interactions with others.

The challenge for our presidential hopefuls is to push beyond the politically expedient and derive solutions that structure healthcare incentives beneficial to all citizens. Fortunately the political process has some time to go, therefore, we can still influence the selection of final apparatus.

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