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HEALTH SPENDING: The Problem Is Government, Not The Market

February 26th, 2008

Editor’s Note: The following post by Rep. Paul Ryan (R-WI) comments on the projections of national health spending from 2007 through 2017, published today by Sean Keehan and his colleagues at the Centers for Medicare and Medicaid Services Office of the Actuary as a Health Affairs Web Exclusive.

The projection that health care spending will reach nearly 20 percent of gross domestic product (GDP) within the next ten years confirms what every leading health care economist is saying: health care spending is out of control, and the time for action is now. But these are not signs that the health care market has failed. In fact – and it is crucial to understand this – they are the predictable results of vast distortions imposed on the market over decades. The government is the single greatest contributor to this problem by the nature of the tax code and the structure of health care entitlement spending; and these can be corrected with fundamental changes in public policy to restore the market’s vitality.

One key problem lies in the federal tax code – specifically, the federal tax exclusion for employer-provided coverage. It is this policy that causes most Americans to rely on their employers for health coverage. But small businesses frequently cannot afford group insurance for their employees, and large companies have tended to restrict the choices of employee coverage on the false premise that such restrictions would restrain cost growth.

This tax policy also undermines the health care market by hiding the true cost of insurance from people covered by it. The current arrangement increases demand for covered medical services and more expensive health plans and creates a bias against millions of unemployed, or self-employed, Americans. Worst of all, the policy creates a third-party purchaser between the patient and the doctor.

Another major distortion in the market is the huge amount of spending the government pumps into Medicare and Medicaid. As the projections show, about half of the $2.4 trillion we spend on all health care nationally comes from taxpayer dollars. And when government pours that much money into any sector, prices go up. The cost of private insurance is also affected, since these programs create benchmarks for private plans.

In other words, Medicare and Medicaid are not simply the victims of rising health costs; they are among the causes. This is why any successful health care reform will require reforming the government’s programs as well.

The point is this: the key to both controlling health care costs and expanding coverage lies in removing the distortions in the market. Instead of further consolidating power over Americans’ health care in a one-size-fits-all system run out of Washington, D.C., we should rely on reforms that can expand health care coverage, improve its quality, and hold down its costs. That means several things, including:

Personal Ownership. Health insurance should be owned by the people who use it – and we can accomplish this by shifting the current tax benefit from employers to individuals and families. We can debate whether it should be a deduction or a credit or what have you – but the point is that it should be changed to promote personal ownership.

Transparency. One of the big problems in health care is that prices are opaque. In the Milwaukee area you can pay $100,000 for a bypass operation at one hospital, and just $48,000 for the same procedure at another hospital. But most patients – and sometimes even the doctors – don’t know this.

Entitlement Reform. Something that’s missing from nearly every major health reform plan being discussed is that they don’t include fundamental reform of Medicare and Medicaid. Unless we reform those programs, and moderate their unsustainable spending growth, they will continue adding to medical inflation – and health care reform itself will fail.

For both Democrats and Republicans who have looked at this issue carefully, there is broad agreement on the problem. Unfortunately, there is no agreement on solutions, and the challenge to address this problem grows exponentially each year. We need to come together, both Democrats and Republicans, with a sustained effort of both parties working together over time. It’s a big challenge, and a complex one, but we can succeed if we are willing to address it realistically, comprehensively, and soon.

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23 Responses to “HEALTH SPENDING: The Problem Is Government, Not The Market”

  1. Neil Gardner Says:

    Wendell_Murray Says:

    March 7th, 2008 at 2:23 pm
    I hope this is last comment from me on this “thread”:

    Good Job with this post! I strongly agree with your explanations!

  2. Arvind Cavale Says:

    The ideas Benjamin has briefly enumerated are exactly what I was hoping he would.

    The medical marketplace is different than other service industries because the consumer and provider of the service are largely eliminated from the economic equation. If I were to need lanscaping services and I had a choice of my nighbor’s son who would do it for $10/hour or the biggest landscaper who would be 100 times as expensive, I could make a calculated decision on what I want based on various factors, one of which is cost. Similarly, the lanscaper could decide if he wants to work on my house. There is no such mechanism in health care delivery, hence the cost of service does not come into the calculation at the time the service is delivered/received. price-fixing by government or insurers based on arbitrarily created calculated values, which are inevitably a “one size fits all” solution. This creates incentives for physicians, hospitals, etc. to focus on those services that are weighted heavily and avoid those that are weighted lightly. Which is why hospitals employ so few Nutritionists and so many Physical Therapists.

    Ultimately, these disconnected decision-makers in government or insurance companies are the ones who encourage or discourage utilisation of services. If there were mechanisms where individual users of care could decide which services were more appropraite for them and could decide based on cost, outcomes, etc. which providers of care they could chose, the marketplace would function much more like a true marketplace. Also, the term “insurance” is a misnomer in healthcare, since “insurance” in any other context is meant to be used only in case of a disaster or emrgency, whereas one could reasonably expect to use healthcare almost routinely.

  3. Wendell_Murray Says:

    I hope this is last comment from me on this “thread”:

    1. Democratic politicians, e.g. Sens. Clinton and Obama, have focussed their reform proposals solely on extending insurance coverage to the currently uninsured. Good objective, but very limited in regard to the potential for change. Each proposal presents feeble efforts at cost reduction in order to “pay” for the increased costs of providing insurance.
    2. The rhetoric from both Senators targets the usual suspect – private insurers – as the evil force.
    3. Private insurers are not “evil” – they are profit- or surplus-maximizing entities just like any other company or non-profit organization in any other industry. The key problem with non-governmental insurers is that the easiest way to maximize profitability (or surplus) is to cherry-pick “customers” who are less likely to be sick and exclude those more likely to be sick . The other key problem with the large number of private insurers is that administrative costs are introduced into the overall system that cause hundreds of billions of dollars of resources to be expended on completely non-value-adding activities whether on the part of the insurers themselves, on patients or on providers. There are many studies that quantify this.
    4. Employer payment of healthcare insurance premiums and employer administration of benefits are a historical fluke that distorts the market, as described by Rep, Ryan and by other comments made. As a consequence, it should be abolished in favor of single payer/insurer.
    5. Ergo the value of single payer/insurer
    6. Democratic politicians for whatever reason are unwilling to address the excessively high costs of healthcare delivery whether through high physician compensation, notoriously unproductive processes in physician offices and in hospitals, no incentives to increase productivity in delivery settings, no evaluation of the cost/benefit of new technologies, no control over pharmaceutical pricing and so on.
    7. As noted previously – the topic that is the impetus for my original comment – on the Republican side there is only blind belief – based purely on ideology and in many cases on the wishes of campaign contributors with interests to protect – that the private marketplace will magically drive down costs and increase quality if patients/consumers were only allowed to purchase medical services like they purchase other consumer goods. Unfortunately, to repeat ad nauseum, the market for medical services does not function like other consumer markets for many reasons. Economic theory shows this is true as does analysis of how healthcare systems work in practice. There is overwhelming evidence of this.
    8. Competitive markets do exists in healthcare, e.g. products and services sold to providers. These can introduce innovation, increase quality and decrease costs just like any other competitive marketplace.
    9. At the margin the introduction of any consumer-oriented technique or policy, e.g. HSAs, publication of prices and outcomes of medical services, walk-in-clinics and so on has a positive impact on costs and quality but one that has a very slight impact relative to the impact of introducing a single payer/insurance scheme and direct intervention administratively on prices of delivery.

  4. bfalit Says:

    I’m not so sure that malpractice liability places a large role in the cost of health care. High premiums certainly affect access as physicians scramble to find cheaper insurance, but I don’t have a good grasp on how this translates into the overall cost of care. My sense is that there are many more important factors that lead to increased costs, most importantly new technology and the aging population. This being said, I believe that a true market based system would help reduce malpractice premiums and ensure that liability is coupled to negligence, rather than mere medical injury. Increased transparency would help juries realize that some adverse events are unavoidable and it will be clearer that the patient consented to the procedure with full information about the risks. Porter and Teisberg make this argument in their book (Redefining Health Care) as well as their JAMA commentary which appeared shortly after the release of the book. Also, in a true market, physicians would be able to calibrate prices according to the risk of malpractice. Physicians who treat high risk patients (e.g. star athlete who has a lot of future earnings to lose) would charge more than a those who treat low risk patients. And what little experience rating there is in malpractice premiums could be passed on to patients via higher prices so that there would be a market incentive to see the safer doctors.

  5. Arvind Cavale Says:

    The second comment by Wendell is far more logical than his first. Anyway, in my opinion, a reasonable way to assess whether a single payer/government-run system functions more cost-effectively and provides better quality of care than the comercial insurance-run system, would be to compare outcomes/costs for people treated exclusively by the VAMCs with the rest of the population. Unfortunately, based on my personal experience, this would be a very difficult subset to identify, as most veterans also utilise care provided by non-VAMC facilities, mainly because of perceived/real inadequacies of the VAMC system.

    As far as the suggestion of medical tourism, etc. and having high cost procedures in India, etc. is concerned, I can say with fair degree of certainty (having first-degree knowledge of medical practice in India) that although physician qualifications/competance in India is comparable (if not superior) to that in the USA, the facilities have a lot to be desired. We are making such a big fuss here about hospital-acquired infections (rightfully so). Just wait till someone gets a bug from an Indian hospital – everything we see here will seem very small when that happens. So one must view “cost” from a global perspective. Besides, with the value of the US dollar slipping on a daily basis, these overseas trips will not be as cost-effective as we think.

    I do agree with Wendell that we do not have a true competitive market in health care, since the power of decision-making is co overwhelmingly concentrated in the hands of the government and insurers, when neither of these entities is actually a buyer or seller of the product (health care). Unless the financial transactions directly involve the buyer (patient) and seller (physician/hospital/lab) I see no way out of this mess.

    It would be good to remind ourselves that “Universal coverage” does not automatically mean “Universal access to care” – just check out the Medicaid mess. The problem with a single payer system will be similar – there will be no incentives for any one to utilise the system effectively and efficiently. Very soon there is going to be significant loss of access to care for the population – just ask what mothers-to-be are doing in the Philadelphia area where they have to drive out of the city to deliver babies. I am amazed that throughout this entire discussion, nobody has considered the direct and indirect cost of the litigious environment on health care – we cannot obviously expect the Democratic Presidential candidates to ever raise this topic for fear of retribution. I only wish this point was openly discussed. But this is a relatively practical method to reduce the in-built cost of liability while providing health care. Given Benjamin’s background, I believe he can comment on this issue.

  6. bfalit Says:


    As I said in a previous post, I think a single-payer system would solve a lot of the problems and provide some much-needed immediate benefit, with the primary advantage being universal coverage. But there are significant advantages to a market-based system. You are correct that the current system does not resemble a competitive marketplace (largely because of the employer-based nature of coverage), but I believe that it is possible (albeit difficult) to create a more perfect marketplace that will ultimately yield more value than a single-payer system.

    In my mind, there are four important reforms that must take place: (a) individuals must be on an even playing field with employers when it comes to the tax advantaged status associated with purchasing insurance (pretty easy to do from a policy perspective, more difficult politically); (b) formal risk adjustment mechanism that transfers funds from payers that enroll the healthy to those that enroll the sick (reasonably easy to do since the risk adjustment algorithms need not be perfectly accurate – they only need to be the best available in order to prevent gaming of the system); (c) mandate the release of audited, risk-adjusted outcome data by payers and providers in order to promote transparency (very difficult to create meaningful data for long-term chronic diseases and thus this is the real sticking point of the reform); (d) Eliminate government payers (easy from a policy perspective yet hard politically – but this is not necessary to the creation of a perfect market so long as the market share held by the government is kept in check to prevent monopsony).

    Creating a competitive marketplace for health care will be difficult, but it’s worth taking on the challenge. Just look at the innovations and cost reductions in other competitive markets (cars, computers, etc.) and you’ll get a taste of what is in store for health care. As an entrepreneur, I am surprised that you have taken such a pessimistic view.

  7. Wendell_Murray Says:

    So-called consumer-driven healthcare has positives, certainly those cited by Rep. Ryan, such as transparency and comprehensive comparison in pricing and outcomes of medical services and anything that encourages consumers of medical services to be aware of and economically feel the cost of the services demanded. No question that those are lacking in the current system. But to propose – as right-wing Republicans consistently do – that there is some sort of competitive market mechanism that will increase quality and lower costs has no justification either in theory (the market for medical services simply does not satisfy the requirements for a competitive market) or any analysis of how medical services markets currently operate. It is exclusively base on ideology. The only competition that would potentially lower prices for very expensive surgical procedures is that offered by offshore providers, e.g. facilites in India, that provide exactly the same level of quality as in the USA by at a fraction of the cost. But that option for reducing costs would still have a vary marginal impact on overall costs. Prof. Fuchs’ and Dr. Emanuel’s Commentary is primarily targeted at the confusion about the functioning of the healthcare system by the current two Democratic contenders for the Presidency in that their rhetoric and healthcare plans perpetuate the myth that somehow private insurance companies or employers are to blame for the ailments of the lack of insurance coverage or miserliness in paying for medical services. Neither is. They both merely operate as best they can within the current system which is determined by laws and regulation, but not by any competitive market forces. On the other hand, there is no reason that private insurers should exist. All they do is add very substantial costs to the overall system. There is good reason why all other industrialized countries have a single payer/insurer systems or a close approximation of that. A single payer/insurer system provides universal insurance coverage at a much lower cost than the USA system. In addition reduction of costs in the USA can only be reduced administratively. Prices are now for all intense and purposes set administratively through the DRG and RBRVS systems. Prices could be reduce tomorrow through those same systems or through implementation of a budgeting system that subsets of providers have to operate within. The healthcare system in every other industrialized country most notably in Canada provides a relevant example of how to structure a much more efficacious system.

  8. bfalit Says:


    “…We can debate whether it should be a deduction or a credit or what have you – but the point is that it should be changed to promote personal ownership…”

    It is strange that you choose this quote to contest, since it embodies once of the most widely accepted (amongst republicans and democrats) principles in health care reform – that the employer-based model distorts the market for health insurance and health care services. Indeed, this point is made by the very first article that you cite as insightful scholarship (the recent Emanuel/Fuchs JAMA commentary). Consider the following quote from this commentary:

    “This is regrettable and perpetuates the widely recognized historical mistake of tying health care coverage to employment. Furthermore, an employer mandate is an economically inefficient mechanism to finance health care. Keeping employers in health care, with their varied interests and competencies, impedes major changes necessary for insurance portability, cost control, efficient insurance exchanges, value-based coverage, delivery system reform, and many other essential reforms.”

    Rep. Ryan, in his comment that you bash with vigor, does nothing more than summarize this point. The concision of his statement is appropriate, given the wide acceptance of the idea. Your post is nothing more than an unsupported, anti-market rant that fails to respond to any substance presented in Rep. Ryan’s post or any of the insightful comments offered by others.

  9. Wendell_Murray Says:

    “…We can debate whether it should be a deduction or a credit or what have you – but the point is that it should be changed to promote personal ownership…”

    If Representative Ryan or someone on his staff actually spent some time reading the many outstanding articles published by Health Affairs over the years he or that person might have some understanding of how the healthcare system in the USA or the systems outside the USA actually function rather than writing the ridiculous comments he has made in this venue. The problem in regard to healthcare reform is the complete unwillingness of Republicans who have dominated Congress since the 1994 elections to understand the most basic of facts and to only propose nonsensical “solutions” as reflected in the sentence reproduced above on the basis of ideology or more perniciously as representatives of vested interests who are on the receiving end of payments whether private insurers, physician political groups such as specialist societies or the AMA, pharmaceutical marketers or medical device manufacturers – i.e. all those on the receiving end of funding that ultimately comes from the taxpayer/patient’s pocket. If Rep. Ryan or his cohort in Congress want to implement reform that will benefit that group of 300 million people he and they should read articles by people who know what they are talking about. To start, read Ezekiel Emanuel’s and Victor Fuchs’ brief commentary in the current (February 2008) issue of the JAMA or an earlier article of theirs on healthcare vouchers as an alternative funding mechanism to single payer/insurer or the current utterly dysfunctional system of private insurance. Or read any article or book by Prof. Robert Evans or the excellent, concise, well-considered book by Dr. Arnold Relman A Second Opinion that not only provides excellent analysis, but specific, intelligent solutions or the outstanding exposition of healthcare policy issues Understanding Health Policy by Thomas Bodenheimer and Kevin Grumbach. There is nothing fundamentally wrong with trying to encourage transparency in pricing of medical services or to encourage means of making “consumers”/patients aware of the cost of services they want and (if insured adequately) receive, but the grossly unrealistic belief that there is some sort of competitive market model that will work in medical services has been disproved theoretically and practically for decades. It won’t because the characteristics of the market for healthcare services do not satisfy the requirements for a competitive market to exist. The current exceedingly high level of cost in the USA system is due to laws passed by Congress that allow the existence of private insurers for no good purpose whatsoever other than to inflate costs by hundreds of billions of dollars a year without providing the slightest competitive force that will drive down costs, that perpetuate the control over price and volume of services by providers themselves (whether hospitals or physicians) through the DRG and RBRVS systems, that provide, as Rep. Ryan notes, a subsidy to premium payments made by employers through the tax system that favors high-earning individuals (what’s new on that topic in regard to Republican policy in general). What does not work now and why is clear. The solutions are also clear. If someone makes the effort to look that is – something that most Republican members of Congress are unwilling to do.

  10. bfalit Says:

    Neil, your question has been pretty well answered in the literature. FFS promotes higher utilization (w/o increases in quality) while short-term capitation agreements promote underutilization. Check out the following article by James Robinson: – this is one of the better pieces I’ve read on this issue. But I still don’t see what the mechanism of reimbursement has to do with selecting a financing vehicle. A single payer system and a market driven system can both make use of any and all types of compensation to physicians.

    Don, you write: “Touting the marketplace without offering real solutions to counter the disastrous consequences of our flawed health care financing system does nothing to advance the cause of reform”

    I normally wouldn’t reference something I’ve written – especially on a blog site – but since you called us out, you can check out this article I wrote a few years back: B. Falit, “The Bush Administration’s Health Care Proposal: The Proper Establishment of a Consumer-Driven Health Care Regime,” Journal of Law, Medicine & Ethics, 34 (2006) 632-639. The system is undoubtedly broken and a single-payer system would surely provide some relief (it would, at a bare minimum, ensure universal access, which is the most important goal in my mind), but there are significant advantages to a market-driven system. Most importantly, it allows innovation to flourish, which can improve quality and reduce costs. We’ve seen continual improvements in cars and computers as their cost has declined; I believe that we can accomplish this in health care as well.

  11. Arvind Cavale Says:

    Could we convert terms like “information asymmetry and provider induced demand” into simpler laguage that average people can understand? If Neil means that physicians create demand for their own services, then I must vehemently deny that accusation. I am sure there are a miniscule minority of folks probably doing that, but a vast majority of physicians practice medicine based on strong principles. I am not sure what information asymmetry means, however.

    One has to accept that physician office visits form a large chunk of health care expenditure. So simplifying that part of the health care exchange would benefit the country as a whole (including cost savings). The hospitals, national laboratories, imaging companies, etc. have the size and clout to engage in true negotiation with insurance companies and the government about fair reimbursement. Small practices (which still constitute about 60% of all physician practices) have no such clout, and will disappear if this process is not simplified.

    By the way, apart from CA, WA and a few other places, a vast majority of people still get their medical care from small practices. So we will be talking about a significant loss of access to routine medical care very soon. It won’t then matter whether you have a single payer or multiple payer system. There will be very few “providers” to chose from. Sustainable reform usually starts from the grassroots and in health care the fundamental unit is the patient-physician relationship, which under tremendous stress right now. While it sounds very elegant to talk economics and technicalities, these will be minor problems when the average American will not have access to routine care. If you believe me, it is already happening.

    Just as an example, those of my collegues who have completely renounced participation in all insurance plans have great relationships with their patients, their patients are satisfied with the attention and care they get, they can get to visit their doctor at the time they need attention (not wait for a Referral to be issued, etc.) and those that get care in real time don’t need to seek Emergency Room care, this saving their insurance companies a lot of money. If people had a choice of coverage – one for rotuine care (office visits) and one for hospital/emergency/laboratory, etc. and if they were given the option of a tax-advantaged program to use for routine care, they would be fully aware of how they were spending for routine care. Hopefully they would then use best judgement to use these resources most appropriately. I suppose trusting people to make good judgement with their own money is not good economic policy, according to those who want Goverment to take control over their lives…

  12. Neil Gardner Says:

    bfalit wrote:

    (Dr.?) Gardner seems to erroneously assume that a market-driven system will utilize fee-for-service payments. To the contrary, a perfected marketplace in health care would leave room for any and all types of compensation arrangements

    I follow you market ideas on payment options to providers which may result, but you did not go near what I was asking. Why? I want to know your opinion (and others) on whether better care, just more care, just less care or poorer care results when FFS is use to pay providers versus non-at-risk salary or capitation. This is a critical question if you believe (as I do) that information asymmetry and provider induced demand are real factors in the cause of our healthcare cirsis.

  13. Don McCanne Says:

    We do have a problem of framing here. Rep. Ryan and some of those replying frame the serious deficiencies in our health care system as being due to a failure of the marketplace, and that if we allowed the invisible hand more freedom, many of the problems would diminish.

    I would frame the problem as being a $2.4 trillion expenditure (more than enough to provide high quality, comprehensive care for everyone) that leaves tens of millions of Americans facing financial hardship, suffering, and, all too frequently, even death.

    Everyone agrees on the importance of the insurance function of risk pooling. But what has changed in the past couple of decades is that health care has now become too expensive to rely on individual private plans to pool that risk. The largest “pool,” those covered by employer-sponsored plans, also happens to be the healthiest – the healthy workforce and their young, healthy families.

    The premium for employer-sponsored family coverage now averages over $12,000 and is paid by the employee as a reduction in wages. That premium now constitutes a financial hardship for middle-income individuals, and if they develop significant health problems, the deductibles, co-pays, coinsurance, out-of-network costs, and excluded services threaten many families with bankruptcy.

    If we do include everyone, the private insurance industry is no longer able to provide, at a premium that is affordable, reasonably comprehensive products that would prevent financial hardship. Individual private health plans are an obsolete method of financing health care.

    At 16.6 percent of our GDP we need risk pooling that not only enables a transfer from the healthy to the sick, but also a transfer from the wealthy to average- and lower-income individuals with health care needs. Tax credit proposals are not only a wasteful administrative nightmare compounding the administrative waste of the private insurers, they also tremendously underestimate the size of the transfer that would be required, and the size of the population that would need to be targeted. The tax system would provide us with a much more efficient and equitable method of accomplishing this goal.

    Touting the marketplace without offering real solutions to counter the disastrous consequences of our flawed health care financing system does nothing to advance the cause of reform. We need to seriously consider a model that really would work: a single payer national health program.

  14. bfalit Says:

    Arvind – I think you are misunderstanding how a market-driven system (as that term is generally understood in the policy debate) would function. Providers (I use the term providers because it encompasses physicians, allied health professionals and entities that provide health care such as hospitals) would still have to deal with many different insurance companies. These insurers would still have significant leverage in the negotiations over physician payment since they have bulk purchasing power and physicians are largely excluded from consolidating selling power by antitrust laws. The technical difficulty associated with securing prompt payment should slow over time as the payers compete against one another for business, but I don’t see this as a primary benefit of moving toward a pure, market-based system. Payers would still place varying degrees of restrictions on patients (co-payments, in-network discounts; limitations on the use of technology, etc.). The only difference would be that patients would have many options for insurance that differ on a variety of fronts, including the extent to which restrictions are placed on care. Some patients will gravitate toward less restrictive plans while others will likely gravitate toward more restrictive plans in order to reap the cost savings.

  15. Arvind Cavale Says:

    I am not a financial/insurance technocrat, so I concede Benjamin’s point, simply because I cannot offer a technical counter-proposal.

    As far as Neil’s point is concerned….first let’s set the record straight. These are “physicians, nurses, etc. ” we are talking about, not “providers”. So please give them their due. They went to 8-12 years of school to become physicians/surgeons/nurses, not “providers”.

    In order to elaborate on my comments, I need to give an example of how a free-market, direct patient-physician relationship would work in real life, not in the context of price-fixed, phoney capitalistic, goverment-controlled system as it exists today. I will also try to explain how it will automatically save the system 5-10% cost right away as well as why it will help improve quality of care and patient-physician relationship, which in turn helps reduce risks of litigation.

    Hypothetical example: Let’s consider an office evaluation of a patient for a charge of $100, Under the current system, the patient pays a % (probably 10%) of “allowable charges”, arbitrarily fixed by the Government or insurer (price-fixing). This “allowable charge” is usualy so much less than what most physicians need in order to operate a financially sound business, that they have to increase the number of appointments per day. This leads to shorter time periods for each patient visit. In order to “process” the claim and get reimbursed, the physician has to either pay 5-10% of each collection to a “billing agent/biller” in addition to purchasing computer equipment in order to process such claims and retain a clearinghouse to process the claims. On average, those claims that are deemed “clean claims” are paid at the “allowable charge” approximately 4-5 weeks after the date of service. A significant minority of claims may be denied for a number of technical reasons, which then have to be reprocessed, delaying payments further. All this costs money, which the practice has to bear with no guarantee of ever getting paid. At the end of the day, neither patients nor physicians are happy because of the ugliness of the whole process. I have not mentioned about how cumbersome it is to process secondary claims and patient-receivables, sometimes even 6 months after the service date.

    If this convoluted process was eliminated, physicians can decide with individual patients what their standard rates for office visits are, and based on financial needs, reset their rates lower or higher, just like other professionals (who don’t have to deal with the government/insurers) do all the time. Patients also have a choice to decide if a physician’s service was worth the money and elect to continue or move to another doctor. Patients currently don’t have that option in most markets because of “in-network provider lists” which force patients to stick with their physicians even though they are unhappy or cannot get along with them.

    The physician can set up visit times based on individual patient needs rather than looking to what a particular “code” will allow under current payment system. The physician’s office automatically saves the costs of employing a biller/billing agent, which can be passed on directly to the patient.

    All these changes would result in the most optimal selection of patients by physicians and physicians by patients, thereby improving long term relationships, which have been decimated by the current system. This would inevitably lead to lower risk of misunderstanding and lawsuits, which would reduce the need to practice defensive medicine. This will not only mean cost saving but also better utilisation of resources. Its a win-win situation.

    As far as monitoring of quality is concerned, I am always bewildered how non-clincal folks come up with such grandiose ideas that somehow they can determine the quality of clinical care better than the clinicians themselves. It would be like I trying to evaluate how well an airline pilot does on his job or how well a judge performs his duties. Neil has to explain this to me…I know that better care will happen once we let the users of health care work directly with those that deliver the care, and eliminate the corrupting influence of the middlemen (both private and governmental).

    Based on thousands of physicians I have talked to, almost 100% of them have told me over and over again that they have ruined their young adult life to become a doctor only because they are strongly motivated to care for the sick. Ofcourse they want to have a good financial return for their efforts. It does not matter whether they are salaried or in private practice, quality care is alway forememost in their minds when they are with a paitent. Cynics like Neil Gardner may disagree, for which there is no convincing answer. Unfortunately, the idea of mutual trust seems to have vanished. Luckily, I can say with confidence that “trust” still rules in our practice…

  16. bfalit Says:

    Let me respond to Neil Gardner’s response to Arvind Cavale. Dr. Cavale first seems to argue, in the section of his post quoted by Neil Gardner, that a market-driven system will somehow result in immediate and full payment to physicians. I fully support a market-driven system (as one can tell from my previous posts), but I don’t see why this is true. Universal coverage of any sort (including a single payer plan) should help to ensure that physicians are paid promptly. Next, I don’t understand how Dr. Cavale makes the logical leap from the premise that “payments will be prompt and in full” to the idea that “patients will understand the true cost of care”. Transparency for both price and quality is indispensable to a well-functioning, market-driven system but it must be designed organically (e.g. through government mandates to release risk-adjusted data). Finally, I don’t understand Dr. Cavale’s logical leap from the premise that “patients will understand the true cost of care” to the idea that “physicians will be able to tailor their rates according to financial need.” Physicians can indeed adjust their rates in the current system. When dealing with insured patients, however, the discount must also flow to the payer (the physician cannot unilaterally waive co-pays). And of course, the physician cannot cross-subsidize by charging the payers of wealthier, insured patients a higher rate (they could attempt to negotiate such a deal, but it would certainly fall on deaf ears). In any event, I don’t see how a perfected marketplace for health care would assist physicians in their ability to price discriminate.

    Regardless of the coherence of the part of Dr. Cavale’s argument quoted by Neili Gardner, I would like to respond to Neil Gardner. Mr. (Dr.?) Gardner seems to erroneously assume that a market-driven system will utilize fee-for-service payments. To the contrary, a perfected marketplace in health care would leave room for any and all types of compensation arrangements. Just as they do in the current system, payers would negotiate rates with providers and entertain all possibilities regarding reimbursement. Indeed, one of the primary benefits of a market-driven system is that it would allow for long-term capitation agreements between payers and providers. Long-term contracts are not possible in an employer-based system because payers’ do not have a long-term base of enrollees (employers switch risk-bearing health plans and employees change employers). Long-term capitation aligns the interests of payers with the long-term health of the patient since the payer can now reap the long-term financial gain associated with up-front investment in preventative care.

  17. Neil Gardner Says:

    Arvind Cavale wrote in part:

    Payment for healthcare services at the time the service is rendered will dramatically decrease the in-built cost in the current system of “billing” where upto 10% of payments are redistributed to billing/collection companies/agents. This will allow full transparency with respect to actual costs of receiving care for patients, and will potentially allow physicians to tailor their rates based on the financial conditions of individual patients (current system does not legally allow this flexibility).

    Hmmmm?? I would hope to see a bit more comments on this one. I get the distinct feeling that the writer has some definite self-serving ideas about patients rights to good care and how financing may effect this. Let me ask this question in light of Dr. Cavale’s ideas. Does fee for service (FFS) automatically mean better care than say salary or capitation for the providers but testing and supplies are paid separately and not by the providers. If there were no other quality accountability monitoring, would provders act the same in both a FFS or a provider not at risk salaried payment system, and if not, why not?

  18. bfalit Says:

    I just want to disagree with one thing that Dr. Cavale states. He writes: “The only addition would be that there has to be an unambiguous legal requirement for all private insurers to provide comprehensive coverage options for people with pre-existing medical conditions.”

    As I wrote in my last post, there absolutely has to be some, substitute risk-pooling mechanism if employer-based coverage is abolished. Mandatory community rating and guaranteed issue laws (essentially what Dr. Cavale asks for), however, are very poor substitutes for formal risk adjustment (transferring money from insurers that enroll the healthy to those that enroll the sick). Absent universal coverage, community rating attracts a disproportionate number of sick enrollees and many insurers either abandon markets or create benefit designs that attract the healthy. And most importantly, even with universal coverage, community rating dissuades insurers and providers from designing innovative systems of care management for the sick.

  19. Arvind Cavale Says:

    Congressman Ryan’s points are the closest to a potential ideal solution for this problem, I have heard so far. As a physician, a small business owner, purchaser or insurance, provider of health care and user of health care, I agree almost completely with Mr. Ryan’s points. The only addition would be that there has to be an unambiguous legal requirement for all private insurers to provide comprehensive coverage options for people with pre-existing medical conditions.

    Contrary to some of the arguments seen below, I have heard repeatedly from many of our patients how one-size-fits-all coverage policies (either employer-based or government-provided) are so inappropriate to fit individuals’ needs for coverage.

    Its very simplistic to coin a phrase like “the waste of non-beneficial high tech excesses” but I would dare anyone to refuse an MRI when the doctor tells them “you may have a tumor, but we need an MRI to look for that”. It is inevitable that healthcare is going to demand an increasingly larger chunk of our national resources – just look at how fast our population is aging and how unhealthy a vast majority of our population already is. But it is also important to recognise that governmental programs like Medicare and Medicaid are a major part of the problem, not a solution.

    Reestablishing a direct trusting patient-physician relationship without meddling by third parties and minimising the practice of risk-averse medicine by reassuring physicians of an stable liability enviroment would be a quick, first step towards the healthcare system work best for all concerned.

    Payment for healthcare services at the time the service is rendered will dramatically decrease the in-built cost in the current system of “billing” where upto 10% of payments are redistributed to billing/collection companies/agents. This will allow full transparency with respect to actual costs of receiving care for patients, and will potentially allow physicians to tailor their rates based on the financial conditions of individual patients (current system does not legally allow this flexibility).

    Allowing employers to permit employees to purchase coverage appropriate to their needs will allow for better redistributing of health care resources.

    Involvement of all players in this debate is clearly needed. Just a bunch of economists discussing this matter is worthless and offers no new way out of this crisis.

  20. bfalit Says:

    Mr. McCanne has no substantive critique of a market-driven system and it doesn’t do much good to rehash the pitfalls of a government-run, single-payer system. But I would like to take a moment to respond to Mr. Gardner and Mr. Broome.

    As I understand it, Mr. Gardner argues that patients will not be sophisticated enough to direct their business toward the payers and providers that offer the best value. This is a legitimate concern, given the current lack of transparency. In order for a market-driven system to function correctly, the government must mandate the collection and dissemination of risk-adjusted, audited outcome data for both payers and providers, just as the SEC does for the financial markets. In a market-driven system, consumers making their own purchasing decisions will demand information, and it will be supplied by entrepreneurial firms that break down the government-mandated information into readily accessible charts, graphs, summaries etc. The closest parallel outside of health care might be Consumer Reports.

    To be fair, the creation of a system that generates meaningful outcome data at all levels will be extraordinarily difficult and require significant tinkering over time. The creation of risk-adjusted outcome data for discrete procedures is one thing, but what matters most for cost-containment is long-term data on chronic diseases. These data will take time.

    Mr. Broome makes a good point as well. If employer-based insurance is abolished, we need some mechanism of risk-pooling as a substitute. The best substitute is formal risk adjustment where money is transferred from the payers with the healthiest enrollees to those that enroll the sick. This provides payers with an incentive to innovate and design mechanisms that control costs for the chronically ill. And if payers receive more money for enrolling a sick patient, they will be willing to pay providers more to care for that patient. Hence, providers will have an incentive to innovate and care for the sick. Community rating laws, with or without mandates to purchase insurance, cannot accomplish this.

  21. Travis Broome Says:

    Heaven, employer or government help any individual the second time they have a serious medical condition because any for profit insurance company subscribing to the theory of maximizing shareholder wealth will not. In any of the current risk pools there are sure to be individuals, who forced to stand alone, would be uninsurable at any price. How to insure individuals who have already had a major medical condition should be at the forefront of any discussion on moving to “personal ownership”.

  22. Neil Gardner Says:

    The point is this: the key to both controlling health care costs and expanding coverage lies in removing the distortions in the market.

    If providers that trained in medicine specifically for 8 or more years and see disease conditions everyday cannot overcome this need/desire for efficiency and effectiveness to keep the system sustainable and again effective, how can the untrained, inexperienced patients ever hope to reign in the system costs and still achieve effective care?? Is information asymmetry just a word that is used outside of market advocate circles??

  23. Don McCanne Says:

    This expression of personal views of pro-market ideology is an obfuscation of the major issues in health care today.

    Singling out entitlements as being a major part of the problem is off-target. The annual growth in NHE over the next decade is projected to be 6.7 percent, whereas the growth in public spending will be about 7.2 percent, including the Baby Boomers. Rather than bashing entitlements, we should be addressing the very real systemic problems that result in such high costs but only mediocrity in health care, at best.

    Establishing an equitably-funded, publicly-administered universal risk pool would provide a mechanism of realigning incentives to improve our primary care infrastructure while reducing the waste of non-beneficial high tech excesses and reducing the administrative waste that typifies the U.S. system.

    Yes, this represents an ideological view as well, that the government can serve us better in the financing of health care. But rather than obfuscation through nonsense statements about personal ownership, this view provides enlightenment on a process that would provide affordable access to reasonably comprehensive health care services for everyone. That can never be achieved by splitting the health care financing pool into 304 million pieces (an exaggeration, but more truthful than the statement that the government is the problem).

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