QandO

July 15, 2004

Health Care Reform
Posted by Dale Franks

David Broder's Washington Post column today describes the concern that senate majority leader (and heart surgeon) Bill Frist has about the US health care system. And there are a lot of concerns.

The United States spends almost 15 percent of its income on health care, far more than other advanced countries. That's about $5,540 a year for every man, woman and child.

Costs are rising four times as fast as wages. One informed estimate places the cost of employer-sponsored health care coverage for the average family at $14,500 in 2006, just two years from now.

The Census Bureau found last year that almost 44 million Americans had gone without health insurance for the previous year. That number has been increasing by roughly 2 million a year. Families USA, a consumer group, says that almost 82 million people, one out of three below age 65, were uninsured at some point during 2002-03, most of them for at least nine months.

Frist also talked about the "inefficiency" of the system, noting that "according to a recent Rand study, patients received recommended care about only half the time for conditions such as my own specialty of heart disease, as well as diabetes."

But there is worse, he said: An estimated 98,000 people die each year from medical errors. Death rates for heart disease are twice as high for African Americans as for whites.

It is a backward industry. Hospitals and doctors invest 50 percent less a year in information technology than retail establishments or the travel industry. Your credit card goes with you, but your medical records -- on paper -- remain buried in some physician's or hospital's files, inaccessible to any other provider if you get sick away from home.

If all of this suggests the need for a massive overhaul, that is exactly the impression Frist wants to leave.

A brief overview of some of them should suffice:

• US Spending on health care is around 15% of GDP, every year, which is about twice the average for OECD countries.


• Costs are rising 4 times faster than wages, and are doubling about every 7 years.


• 44 million Americans have no health insurance, a figure that is rising by about 2 million per year.


• An estimated 98,000 people die each year from medical errors.


• Hospitals and doctors invest 50% less per year in information technology than retail establishments.

A huge part of the problem is that we have, in fundamental ways, segregated medicine off from the general economy. Payment for medical services is mainly made either through government programs, or through third-party insurance payments. In both cases, neither method provides any incentive for the patient to control costs by rationing his health care.

Health care customers are almost entirely insulated from the cost of their own health care. We can see this in something as simple as a regular doctors visit. Let's say a doctor charges $120 for an office visit. What does the patient care about that? A $10 co-pay gets them in to see the doctor whether they have dengue fever, or just a case of the sniffles. Someone else is paying the remainder of that $120 visit and it isn't the patient. As a result, the price of a doctor's visit does not perform the rationing function that prices do in the general economy. So, people go to the doctor more often than they should.

Outside of medicine, increased demand would drive up the price of a good or service. But, in the health care world, increased demand doesn't drive up the price for the consumer. He still has his $10 co-pay. So, he has no incentive to reduce his demand for health care.

Additionally, because of our odd system of employee-provided health insurance, his employer is paying the freight for the insurance premiums. So, if the monthly premium rises, it's the employer that takes the hit, not the actual consumer, who, still has his $10 co-pay. Unlike practically every other good or service you can think of, in our health care system, the health care consumer doesn't pay for almost any of it, but gets to "purchase" essentially as much as he wants.

In the regular economy, when prices start to rise, consumers begin limiting their purchases of that good or service. In medicine, however, when prices start to rise, consumers are mainly unaware of it, because, they aren't actually paying for it in the first place.

That means that insurance companies and businesses have to be the bad guys. Coverages have to be limited. Insurance premiums rise. Employees are forced into HMOs. Doctors have to be paid through capitation, instead of fee for service, which means that they have to take on a huge number of patients to make a profit, meaning that each individual patients gets less care.

The Left then informs us that it's because business owners and insurance companies are greedy corporate oligarchs, who are only interested in increasing profits through the exploitation of the proletarian masses. The fact that the greedy exploiters are giving away more or less free--or, at least, very low cost--health care to the masses is, of course, never mentioned.

And then, of course, there are payments from the government, to cover Medicare and Medicaid. Plus state-level medical programs, like California's Healthy Families program. Cost control measures are even more tenuous in such programs; moreover, they are rife with fraud of the worst sort, because comprehensive monitoring and auditing are almost impossible, both because of the size of the programs, and the relative incompetence of government programs to account for spending in general.

But, wait a second, that's only the payment side of the house. The cost side is equally bleak.

It costs a lot to run a hospital, or even a plain old doctor's office. Medical malpractice for an everyday specialty like OB/GYN runs upwards of $100,000 per year. If you specialize in something risky, like cardiology, or neurosurgery, you could end up shelling out $250,000 a year in malpractice premiums.

That's just the price of entry. That's 1 or 2 hundred grand you've got to shell out even before you nail up the shingle on your door.

Why is the price so high? Because there's a very good chance that John Edwards or his ilk will sue the pants off of you or someone you know, channel the disembodied spirit of a dead child for a jury specifically chosen for its utter ignorance of medicine and things medical, and convince them to award $50 million to a plaintiff.

Frankly, if we had started out to intentionally design a system that inflated costs, we couldn't have done a better job.

If you want medicine to work, and by work, I mean, operate in the same way that obtaining any other good or service works, then you have to make the system market based.

Eliminate 3rd-party medical insurance payments. Make consumers bear the cost of their health care, so that they will ration it themselves as it suits them.

If you want the price mechanism to work properly, you have to make the people who consume health care the people who pay for it. Now, this doesn't mean that we eliminate health insurance. But, it does mean that consumers should be paying for it, not businesses. Let businesses take the money they currently pay for health premiums and pay it directly to the individual as salary.

Modify the tax code to make health insurance premiums deductible, or even tax-credit them. This would have the practical effect of having government subsidize the cost of health care indirectly, while leaving the responsibility for actual payment in the hands of the consumer. After all, the government already subsidizes health care, and gets screwed by doing so because of the cost-inflating nature of third-party payment.

Limit the scope of malpractice suits through tort reform by implementing a "loser pays" system to cut down on questionable malpractice suits. All too often, insurance companies will settle even frivolous claims, because they cannot recoup the cost of defending them, even if they win. Loser pays would greatly reduce the incentive to do so, while, at the same time, leaving them vulnerable in cases of real malpractice.

These suggestions, of course, comprise a massive change to the nature of health care finance. But the system we have is breaking down, is twice as expensive as anyone else's, and is getting more expensive every day. We simply can't ignore the problem any longer.

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