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!

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.

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.

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.

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.

“…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.

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.