One of the most valueless clichés is: “If we can send an astronaut to the moon, why can’t we cure cancer?” The answer is simple: biological systems are orders of magnitude more complex than rockets. Furthermore, the moon does not mutate in order to frustrate us, but viruses do.
That is one of the many harsh realities of health care. I would like to discuss several more, and why current proposed efforts will not improve it. Then I follow with my own realistic (and painful) solution.
More Problems
The fiscal and trade deficits are dwarfed by a third deficit: the unfunded costs of medical care. Simply stated, this is an estimate of the long term cost of medical services promised by the government minus the projected tax revenues. Estimates of the shortfall are at least $50 trillion.
While you will often hear attempts to scapegoat various groups, the facts tell a different story. Medical care has become costly simply because technology has allowed doctors to perform many high technology tests that were impossible in the past. America does spend a higher percentage of its GDP on medical care than other countries, but we get better results. That is why people come here for treatment.
Our life span is a bit shorter than some other countries, but that does not reflect poorly on doctors. It is simply the result of the culture: we eat poorly and engage in too much violence, drinking, and unsafe driving. Our trade policies on drugs (see below) force America to subsidize other wealthy countries. Finally, and most importantly, because of our large (partially) free market, we contribute disproportionately to the cures available to other nations, where innovation is stifled because of price controls and rationing.
I am very proud that preventative tests are widely available in America, but efforts to convince the public that these result in savings are very misleading. If everyone demanded a colonoscopy, there would not be an adequate number of doctors to perform them. The results of most expensive tests are negative, meaning the costs will dwarf any savings resulting from identifying the few individuals who have positive test results.
Even if they result in the saving of a life, the odds are even that the next illness will offset the savings resulting from early detection. This is particularly true for senior citizens. The government loses money on most retirees (and most taxpayers), with the top 10% of earners paying almost 60% of the taxes.
Various bills envision adding up to 47 million new people to the insurance rolls. In addition, 76 million baby boomers are approaching retirement age.
The term “cost savings” normally refers to making a process more efficient, as opposed to merely cutting the pay of competent people. However, medicine cannot be automated the way manufacturing can. There is a minimum time required to service a patient, and each one is different.
Most patients have a minimal understanding of medicine, meaning they cannot provide meaningful feedback as to how to improve health care. Efforts to change life styles or introduce other efficiencies such as additional computerization are unlikely to bear fruit in the near future.
Consultants and professors with doctorates in economics, science, and engineering have worked on efficiencies for decades. Indeed, Ezekiel Emmanuel, a major Presidential health advisor, acknowledged this issue, when he said: “Vague promises of savings from cutting waste, enhancing prevention and wellness, installing electronic medical records and improving quality are merely 'lipstick' cost control, more for show and public relations than for true change”, (Health Affairs, Feb. 27, 2008).
The discussion so far leads to a critical point. If the number of people in the system must rise, and there are no substantive efficiencies, the only remaining options are to spend more as a society, or reduce payments to health care providers. By mathematical necessity, and regardless of what politicians say, reduced payments guarantee rationing: reduced services, lower quality care and longer waiting periods. Those who say otherwise are engaged in what I call “Twilight Zone Accounting”. We are in the position of an event planner who didn’t order enough food for the guests. An old joke puts the issue more succinctly: “Want to lose 25 pounds? Cut off your head”!
Current Proposals
The major bills will increase coverage by as many as 47 million people. Right now, reimbursements to doctors are being cut, with more major cuts planned for Medicare. The result is a reduced incentive for new providers to enter the profession, combined with an increased incentive for doctors to retire.
Due to low reimbursements, the remaining doctors are refusing more and more Medicare patients. Medicaid reimbursements are so low as to endanger the viability of the program. Reducing reimbursements is no more effective in dealing with the problem than is turning down a bathroom scale when a person doesn’t like hi s weight.
Other potential solutions are not under consideration. Tort reform is off the table. Substantive reductions in the deductibility of employer medical plans are also unlikely, thereby eliminating a potential source of funds. Ten to fifteen million illegal immigrants will likely be covered. Even though they are in theory excluded, the use of reliable government verification systems was voted down, and it is easy to forge licenses and passports.
Individual plans are likely to end, as they will not be open to new subscribers, and any routine change in deductibles or copayments means a loss of “grandfathering.” Many employer plans will be cancelled, either because they won’t meet the five year deadline to offer all government mandated requirements or because it is less expensive for employers to pay the 8 percent penalty than to continue to offer insurance.
Attempts by other members of Congress to use market incentives are commendable, but cannot address the fact that as a nation we are living well beyond our means. Furthermore, these plans, to a large extent, are based on tax deductions. Most people in the bottom half of the income distribution pay negligible taxes, so they would not benefit.
My Proposal
My solution starts with an unpleasant reality: citizens must accept that, if they wish to avoid rationing, the nation’s spending on health care will have to grow from 17 percent of GDP to 20–25 percent of GDP. Some key components of my plan:
Every citizen would be required to have a qualified private medical plan. Uncovered adults deemed able to pay would be randomly assigned to a plan. If a person could not afford one, the federal government would provide assistance as described below.
My reason for this hybrid approach is that, with a plan controlled solely by the Federal government, politicians will continue to promise excessive benefits, and then, when the funds are inadequate, reduce reimbursements (“low balling”). This guarantees rationing, but it takes time for the effects to be obvious.
Under my approach, if the funding were inadequate, the problem would be readily apparent, as plan providers would exit the business, and patients would complain about inadequate coverage. Thus the plan providers would effectively act as the representatives of the public, keeping politicians honest.
In general, plan charges could rise with age. For those requiring assistance, sophisticated formulas would be developed over time that adjusted for income, current health, and projected health requirements. Since these plans differ from insurance in that they are both required and open to all regardless of health, I refer to them as “medical plans.”
Plans could be offered by qualified financial institutions and state governments. They could cross state lines, thereby increasing competition. Since there are many states and financial institutions, different approaches would be tried. In general, private firms would have the advantage of efficiency, and the states would have the advantage of long term relationships that would provide a chance to recover the costs of the elderly through the lower costs of the young.
Providers would be required to publish prices, eliminating instances where bills vary by a factor of five or more for the same service. They could charge what they please, but reimbursements would be set at a level close to or slightly below the market price in an area, minus an amount equal to a substantial copayment (to discourage waste).
This approach means that providers would have an incentive to reduce their costs, as they pocket the difference between payment and cost. In a free market, some of these savings would in time flow through to patients. Providers who are perceived as truly superior could charge patients the difference between their higher fees and the allowed reimbursements. This system allows a broad range of incentives for dramatic innovation, while assuring the poor receive adequate care.
There are obvious problems with reimbursement based solely on the number of procedures. However, there are also potential problems with basing it on the number of patients (“capitation”) or “risk adjusting” the patients. Medical plans could experiment with various combinations of formulas, trying to maintain doctor income while imposing some discipline on the use of tests.
The present system encourages the ordering of unnecessary tests in order to avoid liability. The fact that good hospitals suffer the same number of lawsuits as bad ones suggests that juries cannot weigh the difficulty of a case properly, let alone develop a reasonable estimate of damages.
Accordingly, there should be separate courts, with decisions made by tribunals. Greater sophistication needs to be introduced into standardizing awards and regulating legal fees, and this process requires professionals. The success of drug and family courts clearly supports my view that justice often requires the knowledge that only a specialized court can provide.
A new Director of Health Economics would monitor reimbursements to ensure they are sufficient to attract new health care professionals in the right specialties, reversing the current shortage. This would help alleviate the problem of private patients subsidizing public patients. She would ensure that immigration policies would address any shortfall. Finally, she would ensure that government mandates are limited to necessary care, and that the public understands that attempts to irresponsibly expand the plans on the part of “public servants” will have a direct effect on premiums.
Employment based health care was a mistake. Employers don’t offer food and housing plans to their employees—why should health care be different? (The benefit is not free; it results in lower wages.) Deductibility of benefits would be reduced gradually, about 5 percent a year, providing the public with a chance to develop confidence that the new plans are better. The lack of deductibility, combined with the risks of losing coverage in an age of unstable employment, would mean the number of employer plans would decline over time, but they would remain legal.
Although estimates of the uninsured run as high as 47 million, only about 10-15 million citizens are uninsurable, that is, they can’t afford health care. The remaining individuals are in three categories that I would not cover: (a) people who can afford coverage but haven’t purchased it; (b) those eligible for Medicaid, but who haven’t signed up; and (c) illegal immigrants.
As a short term solution, before the full plan is implemented, I would provide medical plans (with assistance) to the 10 to 15 million who are uninsurable. Assuming the cost is between $3,000 and $5,000 per person, the total cost of the “crisis” would be about $50 billion. Given that most of the funds associated with the recent massive stimulus plan remain unspent, and that many of the projects are widely viewed as having marginal value, we could use the unspent funds to cover the needs of the uninsurables for several years.
The required age for Social Security and Medicare must be raised dramatically. These programs were created at a time when the average lifespan was much lower. Society simply does not have enough wealth to support a large fraction of a population that is not working. By the way, the so-called “Trust Funds” are fictional—they are merely inter-agency accounting entries that hide the fact that the money has been spent.
Much of the research and analysis related to health care seems fractured and/or politicized. I would select about a dozen think tanks representing various political views, expertise and focus. Their task would be to develop well reasoned recommendations related to health economics and technology. Their proposals would be televised and the full reports and summaries would be available online.
I would not impose price controls or patent limitations on drug companies. Doing so would reduce the innovation we provide to the entire world. However, I would monitor the artificial extension of patents through excessive litigation. To reduce the drug costs that Americans pay, I would focus efforts on trade with other wealthy countries—insist that they pay the same price as Americans, (rather than the price set under price controls), thereby sharing the burden. To the extent that some patents appear either too generous or not sufficiently so, we could substitute direct awards by the Federal government to the appropriate contributors.
The redesign of health care is one of the most ambitious public policy undertakings in human history. It should be implemented gradually. Plans should be tested in stages on subsets of the total population, such as employees of small businesses or residents of a particular state. And why not fix Medicare and Medicaid, as well as improve public health education, before effectively taking over the whole process? We could then quickly eliminate proposed solutions that are not based on real world experience.
Arthur Wiegenfeld is an independent investor in New York City. He has training in economics, finance, physics and computer simulation. Comments to artw@rcn.com .
